Malta Capital Gains Tax - Tax Charge, Profit Determination, Exemptions
In terms of Article 5 of the Income Tax Act, Chapter 123 of the Laws of Malta, capital gains derived by a person from a transfer of a capital asset, insofar as they are gains of an income nature.
As a general rule, capital gains shall apply on:
- Gains or profits arising from any transfer of the ownership or usufruct of any immovable property or usufruct of any immovable property or the assignnment or cession of any rights over such property;
- Gains or profits arising from the transfer of the ownership or usufruct of or from the assignment or cession of any rights over any securities, business, goodwill, business permits, copyright, patents, trademarks and trade-names; and
- Gains or profits arising from the transfer of the beneficial interest in a Trust;
- Gains or profits arising from a transfer of securities.
The ascertainment of the gains or profits arising from any transfer of immovable property is determined by means of the Capital Gains Rules (S.L. 123.27) which is calculated by compiling the cost of acquisition, inflation, any ground rent, any permissibile deductions, maintenance etc;
Interestingly, a transfer includes any assignment, sale, emphytheusis, partition, donation, settlement of property on trust, distribution and reversion of property settled on Trust etc; The intention of the legislator was thereto to include not only outright transfer or sale, but also other circumstances where a capital asset may be transferred, other than a direct transfer, e.g. a dilution of share capital through a fresh allotment of ordinary shares or a partition of an immovable property.
Donation shall be deemed to constitute a sale. However, no tax is payable where a donation is made to the spouse, descendant or ascendants of the transferor, nor to any philanthropic institutions.
Whilst capital gains are taxable only if such gains are of a capital nature, Article 5A of the Income Tax Act prescribes that, unless otherwise exempt, such as in the case of the transfer of an immovable used as the own residence of the transferor for a minimum of three (3) years from date of acquisition, capital gains shall always be chargeable pursuant to any immvoable property situated in Malta.
Capital Gains Tax Charge
Gains of a capital nature are not taxable in Malta, whilst gains of an income nature are, barring statutory Exemptions, always taxable. The litmus test in determing whether capital gains are taxable or not, is tied to badges of trade.
Badges of trade are subjective tests which help evaluate whether the gain is of a capital nature (and therefore not taxable) or of an income nature (and therefore taxable). Badges of trade include, but are not limited to:
- frequency of transactions;
- profit-seeking motive;
- supplementary works;
- affinity to one’s own trade;
- quantity of the goods; and
- interval of time between purchase and re-sale
Badges of trade should be assessed cumulatively and objectively. The acquisiation of goods for speculation usually entails a gain of an income nature and would be taxable.
Where the gain is of a capital nature, the next test would be whether the gain is exempt or not. Unless listed in the Exemptions, any gains of a captial nature deriving from immovable property in Malta, securities, business goodwill, trademarks, trade names, copyright and beneficial interest in a trust, be, as a rule of thumb taxable.
The Capital Gains Rules set forth the computational rules for the computation of capital gains tax. The amount of capital gains tax is, generally set at 12%, subsequent to the payment of a provisional capital gain.
Specific inflation rules may apply subsequent to the transfer of immovable property in Malta.
Capital Gains Exemptions
The following transactions are exempt from capital gains tax:
- Transfer of shares listed on a stock exchange recognised under the Financial Markets Act, not being securities in a Collective Investment Scheme;
- Transfer of securities listed on a stock exchange recognised under the Financial Markets Act being securities in a Collective Investment Scheme held in a prescribed fund;
- Transfer of units and like instruments relating to long term business of insurance;
- In the case of non-residents, the disposal of any units in a Collective Investment Scheme;
- In the case of non-residents, the disposal of shares or securities in a company, the assets of which do not consist principally of immovable property situated in Malta;
- Transfer of Immovable property assigned between spouses consequent to a judicial or consensual separation;
- Transfer of Immovable property which formed part of the community of acquests between the spouses or was otherwise owned in common between them and is assigned to one of the spouses on the dissolution of the community or is partitioned between the spouses, or the surviving spouse and the heirs of the deceased spouse;
- Transfer of Immovable Poperty used by the transferor as own residence for three years immediately preceding the date of transfer and such residence is vacated within twelve (12) months of vacating the premises;
- Expropriation of property by the Government of Malta;
- Assignment of property on emphyteusis for fifty (50) years years or less;
- Where an asset is transferred from one company to another company, within the same Group of Companies;
- Where a transfer involving an exchange of shares on restructuring of holding upon mergers, demergers, divisions and amalgamations and reorganisations takes place