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Malta's New Tax Incentives targeting Valuable Human Power

June 2013 - Tax & Private Client. Legal Developments by Chetcuti Cauchi Advocates.

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An Eye for Innovation, Creativity & Excellence

‚Ė† Dr Jean Philippe Chetcuti, Malta

On 27th April 2012, Malta Enterprise, the University of Malta and the Malta Council for Science and Technology in collaboration with the Ministry of Finance, the Economy and Investment launched the Digital Gaming Strategy for Malta to facilitate the growth of this lucrative niche as an offshoot of the flourishing ICT industry.

 

 

Growth potential has been identified in the digital gaming arena particularly in view of the strong ICT industry on the island and the possibility of transferring skills and technology not only from other existing sectors such as software development or iGaming, but also from other industries such as film and audiovisual.

1.    Qualifying Employment in Innovation and Creativity (Personal Tax) Rules, 2013

Legal Notice 106 of 2013 (Qualifying Employment in Innovation and Creativity (Personal Tax) Rules, 2013) provides that, as from 1st January 2012, employees working in development of innovative and creative digital products may choose to have their employment income in respect of work exercised in Malta to be chargeable at a flat rate of 15% tax in lieu of progressive rates of tax which can be as high as 35%. 

1.1.     Criteria for Qualification

Legal Notice 106 of 2013 covers employees working in the development of innovative and creative products industry, and provides that for such employee to benefit, he/she must:

¬∑         hold a qualifying contract of employment

¬∑         hold an eligible office

¬∑         submit an application to Malta Enterprise (ME) for its approval

¬∑         hold a qualifying contract of employment under which contract one's employment income is of a minimum of Eur45,000 per annum exclusive of any fringe benefits.

Prior approval in writing is required by Malta Enterprise, which must be satisfied that the employer or a person related to the employer has not benefitted from any business incentive laws and/or any arrangement in terms of the business incentive laws.

1.2.     What Constitutes an "Eligible Office"?

Roles which are directly engaged in the development of innovative and creative digital products need to be assessed. These include roles such as:

¬∑         Chief Executive Officer,

¬∑         Chief Technical Officer,

¬∑         Chief Creative Officer,

¬∑         Head of Art Design and Visualisation,

¬∑         Art Director, Digital Artist,

¬∑         Commercial Director (Digital Licensing),

¬∑         Head of Marketing.

There are also a number of conditions under the scheme that must be me, including:

¬∑         derive employment income in respect of work or duties carried out in Malta, or in respect of any period spent outside Malta in connection with such work or duties, or on leave during the carrying out of such work or duties;

¬∑         be in possession of the requisite qualifications and experience to be able to hold the eligible office;

¬∑         be protected as an employee under Maltese law for the purpose of exercising genuine and effective work for or under the direction of someone else and has the requisite adequate and specific competence as approved by ME;

¬∑         prove to the satisfaction of ME that he performs the activities of an eligible office;

¬∑         declare for Maltese income tax purposes all his income received under the qualifying contract of employment and all income received from a person related to his employer;

¬∑         prove to the satisfaction of ME that he is in receipt of stable and regular resources which are sufficient to maintain himself and his family.

¬∑         have a sickness insurance policy in place which covers him and his family in respects of all risks while in Malta;

¬∑         reside in a suitable accommodation;

¬∑         not domiciled in Malta;

¬∑         be in possession of a valid travel document.

1.3.     Tax Treatment in Malta

If all the above conditions are met, income derived from a qualifying contract of employment will be deemed to be the individual's first part of his income and will be subject to a flat rate of tax of 15% without the possibility to claim any deductions, relief, set-offs or credits, whether under a relevant double tax treaty or otherwise. Any income from a qualifying contract of employment which exceeds Eur5,000,000 will not be subject to tax in Malta.

The scheme applies for a consecutive period of up to three years for EEA, Swiss and third country nationals. The three consecutive years will commence from the year in which the person was first liable to tax in Malta. If the first year of assessment in which the individual was first liable to tax in Malta was prior to year of assessment 2013, the option will be available for year of assessment 2013 and for the four subsequent years of assessment starting from the first year of assessment. As soon as the eligible period (three years) expires, the employment income would then be chargeable to tax at normal rates of tax applicable to individuals.

Any rights acquired by third country nationals under these rules, will be deemed to have been withdrawn if he stays in Malta for more than 1460 days in the aggregate or directly or indirectly acquired immovable property situated in Malta. Individuals cannot benefit from this scheme if they have already benefitted from a reduced rate of tax under any other rules and regulations applicable in Malta. The option may not be exercised in respect of any year of assessment preceding year of assessment 2013 and unless the option has been approved by ME.

2.    Repatriation of Persons established in a Field of Excellence Rules, 2013

This Regulation is intended to achieve Malta's aim towards achieving a ‚ÄėCentre of Excellence Status' throughout Europe and with third country states.

As part of this Strategic Plan, Legal Notice 111 of 2013[i] has introduced a new incentive scheme. Though this scheme Maltese professionals, established in a field of excellence and repatriating to work in Malta as ordinary residents in specific industry sectors, may opt to have their employment income, in respect of work exercised in Malta, chargeable to tax at a flat rate of 15%. This rate is as opposed to progressive rates of tax which can be as high as 35%.

2.1.     Criteria for Qualification

"Eligible Persons" must show that they have been ordinarily resident in Malta for at least 20 years, but has not been ordinarily resident in Malta for the 10 consecutive years prior to their return to Malta. A qualifying contract of employment must be presented by the employee and it must be shown that this employee is employed in a field of excellence in the areas of manufacturing and R&D, in such sectors as may be defined by Guidelines still to be issued by Malta Enterprise (ME).

2.2.     Field of Excellence

"Field of Excellence" has been defined as an area of professional competence in which an eligible person has excelled and which area is relevant for the manufacturing and research and development sectors, as may be defined in Guidelines which may be issued by ME in terms of the Malta Enterprise Act.

The employee must receive income of a minimum value of Eur75,000 per annum exclusive of any fringe benefits. Prior approval in writing is required by ME.

2.3.     Beneficiary

A beneficiary must:

¬∑         derive employment income in respect of work or duties carried out in Malta, or in respect of any period spent outside Malta in connection with such work or duties, or on leave during the carrying out of such work or duties

¬∑         prove to the satisfaction of ME that he is in possession of the requisite educational and / or professional qualifications relevant to the profession or sector of field of excellence

¬∑         show that he is protected as an employee under Maltese law for the purpose of exercising genuine and effective work for or under the direction of someone else and has the requisite adequate and specific competence as approved by ME

¬∑         declare for Maltese income tax purposes all his income received under the qualifying contract of employment and all income received from a person related to his employer.

2.4.     Tax Treatment in Malta

Such income will be deemed to be the individual's first part of his income and will be subject to a flat rate of tax of 15% without the possibility to claim any deductions, relief, set-offs or credits. Any other income received by the beneficiary, will be subject to tax at the rate of 35%.

The scheme is affective from tax basis year 2013. It applies for a consecutive period of up to five years and commences from the year in which the person was first liable to tax after returning to reside in Malta. The option may not be exercised in respect of any year of assessment preceding year of assessment 2013.

3.    Conclusion

Both these schemes and the incentives they present are another very important step towards attaining Malta's aim to become the quintessential digital society. Current and past administrations have always pushed Malta to become a centre of distinction and competitiveness in the Innovation, Creativity & Excellence fields. Such schemes also ensure that valuable human capital chooses Malta as their digital hub and in turn, such employees enhance local expertise and know-how which are pivotal in the development of the island.

More detailed information on these two incentive schemes can be found in the detailed publications named: Repatriation of Persons established in a Field of Excellence Rules, 2013 & Malta Reduced Tax Rate for Qualifying Expatriates operating in Digital Products