Month: September 2019

Malta is an attractive and progressive jurisdiction for company incorporations. Located within the EU, it is introducing new laws and regimes, on an on-going basis, to consolidate this position. New laws include ‘New Consolidated Group Rules,’  introduced in May 2019, and new ‘Patent Box Regime Rules,’ implemented in August 2019.

NEW CONSOLIDATED GROUP RULES

Malta Full Imputation Tax Regime

Malta’s competitive tax regime is based on a full imputation system. Tax on the profit paid, by the company distributing dividends, is made available to shareholder as a tax credit.

A non-Malta resident shareholder receiving profit dividends, can request a tax refund.

New Consolidated Group Rules – Cash Flow Benefits

Malta published new ‘Consolidated Group Rules’ on 31 May 2019. These come into  effect for tax year 2020, relating to relevant organisations with accounting periods in calendar year 2019.

• One of the advantages of the new consolidation regime is that cash flow benefits can be enjoyed by eliminating the time lapse for the receipt of applicable tax refunds, once relevant tax returns have been filed.

Further details can be found in Article: IN609 Malta Introduces Consolidated New Group Rules – Offering Cash Flow Advantages.

NEW PATENT BOX REGIME

Malta’s New Patent Box Regime

Malta published new Patent Box Regime (Deduction) Rules in August 2019 and the Patent Box Regime deduction is calculated using the following formula:

The resultant figure is the amount that can be deducted from the gross income of the company, that created and developed the IP in Malta, thereby reducing the income that is taxable.

Further details can be found in Article: IN610: Malta’s New Patent Box Regime.

   Additional Information

If you would like further information regarding The New Consolidated Group Rules or the New Patent Box Regime in Malta, please contact the Dixcart office in Malta: advice.malta@dixcart.com or your usual Dixcart contact.

Malta published new Patent Box Regime (Deduction) Rules  in August 2019. The rules apply to relevant income derived from qualifying intellectual property (qualifying “IP”) as from 1 January 2019.

Qualifying Intellectual Property

Qualifying IP is defined as:

• a patent or patents, whether issued or applied for (if applied for it assumes the patent is granted);
• assets for which protection rights have been granted in relation to national, European or international legislation;
• utility models;
• software, protected by copyright, under national or international legislation;
• in relation to small entities, other IP assets defined as being, ‘useful, novel and having features similar to those of patents’. Malta Enterprise will define and confirm this category by issuing certificates as appropriate

Marketing related intellectual property assets including; brands, trademarks tradenames do not constitute qualifying IP.

Conditions

Detailed information regarding the conditions, to claim the deduction, are available from the Dixcart office in Malta.

Deduction Calculation

The Patent Box Regime deduction is calculated using the following formula:

The resultant figure is the amount that is deductible from the gross income of the company, that created and developed the IP in Malta, thereby reducing the income that is taxable.

Qualifying IP Expenditure

The income or gains derived from qualifying IP include:

• taxable income which is derived from the use, enjoyment and employment of the qualifying IP;
• royalty or similar income;
• advances and similar income derived from the qualifying IP;
• any sum paid for the granting of a licence in relation to the qualifying IP;
• compensation for infringements in respect of qualifying IP;
• gains on disposal of qualifying IP.

The determination of qualifying income or gains must always be made using an appropriate Transfer Pricing method.

The costs taken into account when calculating Qualifying IP Expenditure consist of:

• expenditure incurred directly and/or relevant subcontracting costs; and
• other equivalent expenditure but excluding; interest payments, building costs, acquisition costs and/or any costs that cannot be directly linked to a specific qualifying IP asset.

Expenditure for general and speculative R&D which cannot be included in the qualifying IP expenditure of a specific qualifying IP asset can be divided pro rata across all of the qualifying IP assets.

Total IP Expenditure

Qualifying IP Expenditure can never exceed Total IP Expenditure.

Total IP Expenditure comprises expenditure directly incurred in the acquisition, creation, development, improvement or protection of the qualifying IP:

• relevant expenditure incurred by the beneficiary and constituting qualifying IP expenditure and other expenditure incurred by another person which would constitute qualifying IP expenditure had it been incurred by the beneficiary; and
• acquisition costs and expenditure for outsourcing activities.

Losses from Qualifying IP

If the beneficiary incurs a loss in respect of the qualifying IP which he is entitled to set against income or gains he can elect to benefit from one of the following:

• a deduction corresponding to 5% of the loss; or
• a deduction corresponding to the full amount of the loss subject to:
  • the beneficiary not being entitled to claim the tax treatment for any subsequent year of assessment; and
  • in any subsequent year of assessment, any such loss being deducted from the “Income or Gains derived from qualifying IP” until such losses are fully utilised.

Additional Information

If you would like any further information on this subject, please contact the Dixcart office in Malta: advice.malta@dixcart.com or your usual Dixcart contact.

Background

The addition of Shaun Drake to the Guernsey office has enabled Dixcart to provide a new suite of services to listed (or public) companies that trade on worldwide stock exchanges. Shaun is a professional company secretary with 20 years of listed company experience with companies trading on stock exchanges in the UK, Canada, USA and Australia. He presently acts for a number of listed companies in an officer role (Company Secretary) and has also served as a non-executive director of private and listed companies.

With the recent growth of The International Stock Exchange (TISE) and continued strength of the London Stock Exchange (LSE) and Alternative Investment Market (AIM), the need for experienced company secretaries is greater than ever. In the past, Shaun has provided services to listed companies covering a wide range of market sectors: mining and mineral exploration; oil and gas; financial services; royalty streams; manufacturing; real estate; cannabis; and high tech.

What Services Can Dixcart Offer?

• Provision of a professional company secretary with 20 years of public company experience.
• Management of Board and Committee meetings: pre-meeting discussion with Chairs; draft agendas; circulate meeting materials; attend and act as recording secretary; prepare initial ‘To Do’ list from the meeting and provide full minutes.
• Assistance with ongoing regulatory compliance for listed entity and insiders.
• Oversee AGM process and assistance in preparing shareholder meeting materials.
• Provide advice on corporate governance practices including the preparation of a full suite of corporate mandates / charters / policies.
• Monitor corporate governance compliance to ensure best practices are being maintained.
• Undertake annual Board assessments and tabulate results in a confidential manner.
• Act as the liaison for the client company with the registrar, professional advisors and corporate stakeholders.
• Develop a good working relationship with the C-Suite (top senior staff) and Board members.
• Minute Book custody in both hard copy and electronic format.
• Provision of an administrative substance expected of operating companies.

Private Companies

Some private companies require their internal governance to be at the same level as that of a listed company, especially where the shareholders have invested significant financial capital. Shaun has acted for a number of private companies in the past, working with management and the Board to determine the most appropriate level of corporate governance. This is particularly of interest to a private company that is seeking an exchange listing as part of its short to medium-term corporate strategy.

Attendance at Meetings

Many Board and Committee meetings are held by telephone conference call or web-hosted. However, as the Guernsey office is only a short thirty-five minute flight to London by air and has excellent transport links to other key UK airports, which enables easy access to European and international connections, attendance in person for Board and Committee meetings is easily facilitated.

What Advantages Does Dixcart Offer?

Dixcart provides effective and efficient solutions to listed company clients, using experience gained over 20 years.

The cost effective solution for a listed company is to outsource the company secretary role until there is a requirement to engage a full time in-house person. Dixcart is well positioned in this market to provide an experienced company secretary, whether as an officer position or in an advisory role.

Further Information

For further information on this topic please contact your usual Dixcart adviser or speak to Shaun Drake in the Guernsey office: advice.guernsey@dixcart.com.

Background

On 3 May 2019, Portugal introduced amendments to Portuguese Taw Law, in accordance with the European Union (EU) Anti-Tax Avoidance Directive (ATAD). ATAD provides a set of anti-tax avoidance provisions across EU Member States. Provisions include:

• Controlled Foreign Company (CFC) rules – to deter profit shifting to a low, or zero tax country
• Exit Taxation – to prevent companies avoiding tax when transferring assets
• General Anti-abuse rule – to counteract aggressive tax planning when other rules do not apply
• Hybrid Mismatch rule – to prevent double non-taxation of defined income between jurisdictions
• Interest Limitation – to discourage artificial debt arrangements, designed to minimise taxes

With the exception of the Hybrid Mismatch rule, Portugal has introduced new rules to implement the above measures into Portuguese Tax Law.

Controlled Foreign Company Rules (CFC Rules)

To be subject to the Portuguese CFC rules, the following criteria apply:

• The territory is included in the Portuguese tax haven list, OR
• The corporate tax rate, relevant to the subsidiary, is less than 50% of the tax rate due under Portuguese corporate tax rules (less than 10.5%, as the Portuguese corporate tax rate is 21%).

CFC rules do not apply if the “passive” income does not exceed 25% of the total income of the entity – i.e. royalties, dividends, income from financial leasing, sale of shares, operations exclusive of the banking system, interest, and defined commercial income obtained from related parties, that add little or no economic value.

The minimum participation threshold has been reduced from 25% to 10% of the share capital or voting rights, for taxpayers resident in Portugal. This applies when at least 50% of the shares and rights are held, directly or indirectly by taxpayers (corporate or individuals), resident in Portugal. Share capital and rights, held by related parties to the CFC, are also taken into account.

If certain conditions are met, it may be possible to deduct tax losses.

Depending on the specific circumstances, a number of additional rules may apply, relating to the taxation of CFCs.

Exit Taxation

Key changes relate to the transfer of assets from Portugal to another country.

The exit tax provision has been amended; the taxpayer of a Portuguese resident company, transferring tax residence abroad to an EU or EEA Member State, can no longer opt for the payment of tax when the gains are realised.

There are two options:

• Immediate payment of the full tax amount, OR
• Payment of the full tax amount in equal instalments over a five year period (under certain circumstances).

If the second option is chosen, a bank guarantee may be requested, late payment interest charged and annual tax returns will be required. Specific procedures and criteria must be met and Dixcart recommend that professional advice should be sought.

General Anti-Abuse Rule

The General Anti-Abuse rule is now applicable to ALL matters considered to be abusive (tax avoidance and evasion), that do not have a “genuine” reason taking into account “all facts and circumstances”.

Where the situation is considered to be abusive, any corresponding tax advantage will be assumed to have been enjoyed by the Ultimate Beneficial Owner (UBO).

Hybrid Mismatch Rule

Portugal will implement the Hybrid Mismatch rule at a future date.

Limit: Tax Loss Deductibility

The Portuguese Corporate Income Tax (CIT) Code already included an interest deduction limitation rule, under which the deduction of net financing expenses was capped by the higher of the following two amounts:

• 30% of the taxpayer’s earnings, before interest, tax, depreciation and repayment, adjusted for tax purposes, OR
• €1 million.

To comply with ATAD requirements, the definition of “net financing expenses” has been amended. Comprehensive details are available on request.

Additional Information

For additional information on the changes made to the Portuguese Tax Law, and the implementation of the Anti-Tax Avoidance Directive in Portugal, please contact the Dixcart office in Portugal: advice.portugal@dixcart.com. Alternatively, please speak to your usual Dixcart contact.

The EU Code of Conduct Group (Business Taxation) (“the COCG”) have been working with the Crown Dependencies (Guernsey, Isle of Man and Jersey) to review ‘economic substance’. The EU Code Group concluded that the Isle of Man and Guernsey were compliant with most of the EU principles of good tax governance, including the general principles of “fair taxation”. However, one area that raised concern was the area of  substance.

The Isle of Man and Guernsey, have made a commitment to address these concerns by the end of 2018 and the islands have subsequently worked together with the COCG to develop proposals to meet their commitments.

Implications

Increasingly substance must be demonstrated, and clients are advised to use professionals such as Dixcart, who are experienced in providing the level of substance needed to ensure that the appropriate measures are in place.

The main elements of the COCG proposals include:

Identification of Organisations Conducting “Relevant Activities”

The classification of “relevant activities” has been derived from ‘categories of geographically mobile income’, as identified by the OECD Forum on Harmful Tax Practices. These include organisations undertaking the following activities:

• banking
• insurance
• intellectual property (“IP”)
• finance and leasing
• fund management
• headquarter type activities
• holding company activities; and
• shipping

Impose Substance Requirements on Organisations Undertaking Relevant Activities

This is a two part process.

Part 1: “Directed and Managed”

Resident companies undertaking relevant activities will be required to demonstrate that the company is “directed and managed” in the jurisdiction, as follows:

• Meetings of the Board of Directors in the jurisdiction at adequate frequency, given the level of decision-making required.
• During these meetings, there must be a quorum of the Board of Directors physically present in the jurisdiction.
• Strategic company decisions must be made at the meetings of the Board of Directors and the minutes must reflect those decisions.
• All company records and minutes must be kept in the jurisdiction.
• The Board of Directors, as a whole, must have the necessary knowledge and expertise to discharge their duties as a board.

Part 2: Core Income Generating Activities (“CIGA”)

Tax resident companies, in any of the Crown Dependencies must demonstrate that the core income generation activities are undertaken in that location (either by the company or a third party – with suitable resources and receiving appropriate payment).

Companies conducting a relevant activity must demonstrate:

• That an adequate level of (qualified) employees are employed in the appropriate Crown Dependency location, or that there is an adequate level of expenditure on outsourcing to a suitably qualified service company in that location, proportionate to the activities of the company.
• That there is an adequate level of annual expenditure incurred in the appropriate Crown Dependency, or an adequate level of expenditure on outsourcing to a service company in that location, proportionate to the activities of the company.
• That there are adequate physical offices and/or premises in the appropriate Crown Dependency location, or an adequate level of expenditure on outsourcing to a service company in that location, commensurate with the activities of the company.

Enforcement of the Substance Requirements

In order to demonstrate the effective enforcement of these measures, companies that refuse to comply with the provisions will suffer penalties and sanctions, and could ultimately be struck off.

Impact on Other Jurisdictions

These measures, and the relevant processes, apply to jurisdictions other than Guernsey, Isle of Man and Jersey, and include Bermuda, BVI, Cayman Islands, UAE, and an additional 90 other jurisdictions.

Summary

Whilst the measures are significant, much of what is required is already in place in a number of the relevant jurisdictions.

Clients, however, need to appreciate that if a business is based ‘offshore’ it must have a ‘Permanent Establishment’ with real substance and value in that specific jurisdiction.

How Dixcart can Help Provide Substance, Management and Control in Guernsey and the Isle of Man

Dixcart has Business Centres in Guernsey and the Isle of Man which offer serviced office space and can also assist with the recruitment of staff and the provision of professional services, if required.

The Dixcart Group also has a long history of providing professional management to the shareholders of companies, with services including:

• Full management and control of companies through the appointment of Dixcart directors. These directors not only manage and control the company in the Isle of Man and Guernsey, but also provide an auditable record of that management and control.
• Full administration support, including day to day bookkeeping, accounts preparation and tax compliance services.
• In certain circumstances Dixcart can provide non-executive directors to sit on the Boards of companies. These non-executive directors will monitor developments in the company and help protect the clients’ interests.

Additional Information

If you would like additional information, please speak to the Dixcart office in Guernsey: advice.guernsey@dixcart.com or to the Dixcart office in the Isle of Man: advice.iom@dixcart.com.

Dixcart Trust Corporation Limited, Guernsey. Full Fiduciary Licence granted by the Guernsey Financial Services Commission. Guernsey registered company number: 6512.

Dixcart Management (IOM) Limited is licensed by the Isle of Man Financial Services Authority.

Malta – Full Imputation Tax Regime

Malta’s competitive tax regime is based on a full imputation system. Tax on the profit paid by the company distributing dividends, is made available to the shareholder as a tax credit, to avoid double taxation on the same income (for the company and subsequently for the shareholder).

A shareholder receiving profit dividends can request a tax refund on those profits paid by the company in Malta. The amount of the refund depends on the nature of the distributed profit and if these have benefited, or not, from double taxation relief.

Cash Flow Benefits of New Consolidated Group Rules

Malta published new ‘Consolidated Group Rules’ on 31 May 2019. These will come into  effect for year of assessment 2020, relating to ‘fiscal units’ with accounting periods commencing in calendar year 2019.

• One of the advantages of the consolidation regime is the cash flow benefits that can be enjoyed, by eliminating the time lapse for the receipt of applicable tax refunds, once relevant tax returns have been filed.

The new ‘Consolidated Group Rules’ will make income tax calculations, reporting of group companies and other group matters, easier, as detailed in the next section. This is because all income, outgoings and expenses derived by ‘transparent companies’ will be considered as if incurred by the principal taxpayer. The same applies to  transactions between the principal taxpayer and ‘transparent subsidiaries’.

What is a ‘Fiscal Unit’ and How is it Established?

The parent company, and any relevant subsidiaries, can make an election to form a ‘fiscal unit’, provided that each subsidiary has the same accounting period as the parent company and as long as two of the following conditions are met:

• The parent company holds at least 95% of the voting rights in the subsidiary company;
• The parent company is beneficially entitled to at least 95% of the profit available for distribution to the ordinary shareholders of the subsidiary company;
• The parent company would be beneficially entitled to at least 95% of the assets of the subsidiary company available for distribution to its ordinary shareholders, in the event of a winding up.

Where such an election has been successfully made, each ‘95% subsidiary’ will form part of the ‘fiscal unit’ of the parent company, with such subsidiaries being referred to as ‘transparent subsidiaries.’ Where a ‘transparent subsidiary’ is itself a parent company, its ‘95% subsidiaries’ will also join the fiscal unit.

Companies which are not resident in Malta can form part of a ‘fiscal unit’, however the principal taxpayer must at all times be a company registered in Malta, and with a permanent establishment in Malta.

The ‘Fiscal Unit Regime’ is optional.

Chargeable Income

Members of a fiscal unit, other than the principal taxpayer, will be considered transparent entities for Maltese income tax purposes. As a result, income and gains earned by these transparent subsidiaries will be attributed to the principal taxpayer. Similarly, expenditure and capital allowances incurred by transparent subsidiaries will be attributed to the principal taxpayer.

Transactions between members of the fiscal unit will not be taken into account, with the exception of transfers of immovable property situated in Malta, and transfers of property companies.

Income or gains allocated to the principal taxpayer will retain their nature and source. The ‘rules’, however, incorporate a number of ‘deemed source rules’.

One such rule is that income or gains, earned by a non-Malta tax resident transparent subsidiary, will be attributed to the permanent establishment of the principal taxpayer situated outside of Malta, as long as the transparent subsidiary maintains sufficient substance in that particular jurisdiction.

Compliance Obligations

The principal taxpayer will be required to prepare a consolidated balance sheet and consolidated profit and loss account covering all companies within the fiscal unit.

The principal taxpayer will also be responsible for filing the tax return of the fiscal unit. The other ‘members’ of the fiscal unit are exempt from filing their respective tax returns, however, all members are jointly and severally liable for the payment of tax.

Additional Information

If you would like any further information on this subject, please contact the Dixcart office in Malta: advice.malta@dixcart.com or your usual Dixcart contact.

History –  The ‘Substance Regime’

On 1^st January 2019 the ”substance-based regime” was introduced into the Crown Dependencies (Guernsey, Jersey and the Isle of Man).

This has meant that since January 2019, companies engaging in “relevant activities” have had to demonstrate that they meet specific substance requirements, to avoid sanctions.

This ‘Order’ is in response to a comprehensive review, carried out by the EU Code of Conduct Group on Business Taxation (COCG), to assess over 90 jurisdictions, including the Crown Dependencies, against standards of:

– Tax transparency;

– Fair taxation;

– Compliance with anti-BEPS (base-erosion profit shifting).

The review process took place in 2017 and although the COCG were satisfied that generally the Crown Dependencies met the standards for tax transparency and compliance with anti-BEPS measures, the COGC raised concerns that the jurisdictions did not have:

“A legal substance requirement for entities doing business in or through the jurisdiction.”

Crown Dependencies – Response

Stage 1  –  To identify  “relevant activities”.

The type of structures that were reviewed, included:  banks, insurance, shipping, and fund management. It would generally be expected that substance obligations would need to be met for these “relevant activities”.

Where it is greyer and more challenging is in relation to corporate and private client relevant activities, where substance is not straightforward. Specific areas that need to be considered, by professional advisors, include:

• Financing and leasing operations;
• Headquarter Companies and activities;
• Holding Company activities;
• The holding of Intellectual Property;
• Distribution and service centres.

These latter five areas have the potential to be forgotten, by many private client and group organisations.

Not only are offshore jurisdictions being challenged but also onshore jurisdictions, such as: Ireland, Netherlands and Luxembourg, are starting to bring in their own version of the substance requirements.

Stage 2 – To impose substance requirements on companies undertaking relevant activities.

This will be achieved through the completion of local tax returns in the jurisdiction where the entity is established. Additional detail is required in several areas, including; levels of employment (in and out of the jurisdiction), outsourcing services, permanent establishment (rent, infrastructure), true control and management, and the use of local skills.

Failure to meet substance requirements will result in penalties, and ultimately ‘striking off’ of the company, and the assets de-faulting to the state.

Why are Jurisdictions Enforcing Such Regimes?

Each jurisdiction has agreed to undertake assessment by the Organisation for Economic Cooperation and Development (OECD), to monitor the implementation of the substance based regime. The failure of a jurisdiction to implement a suitable economic regime will result in it becoming a “grey” or “black” list regime, which will ultimately lead to economic sanctions against the jurisdiction. No jurisdiction, at a political or economic level, can afford for this to happen.

Tax transparency and substance must be met by organisations. They need to comprehensively address these requirements through action and investment to help find long term solutions.

The “True” Tool Kit to Meet the Requirements of a Substance Based Regime   

Dixcart have invested extensively, over the past ten years, to help establish economic substance with clients. This has been achieved through investment in several different aspects of the business:

1. The provision of serviced offices across five locations within the Dixcart Group – many Dixcart clients have taken up the opportunity to use serviced offices within the Dixcart Group.

2. The provision of suitably qualified and experienced Dixcart professionals to appropriate company boards, often where specific industry knowledge is required.

3. The provision of cross border arrangements where the client and Dixcart directors provide a joint working environment to deliver a long-term solution for the client position. Dixcart provide the statutory legal support and the client the in-depth specific knowledge in relation to the industry and business.

4. ‘Local’ advice regarding the recruitment of staff and Non-Executive Directors to the Board.

5. Introductions locally to other services providers with relevant skills: banks, compliance, regulators, IT, etc.

Please visit the Dixcart Business Centre website for further information regarding the Dixcart serviced office facilities: www.dixcartbc.com

Additional Information

If you would like additional information regarding the Dixcart Business Centres in: Guernsey, Isle of Man, Malta, Portugal and the UK, please speak to your usual Dixcart contact or to the Dixcart offices in Guernsey or the Isle of Man: advice.guernsey@dixcart.com and advice.iom@dixcart.com.

An additional Dixcart Business Centre is opening in Cyprus, later this year (2019).

 

Dixcart Trust Corporation Limited, Guernsey: Full Fiduciary Licence granted by the Guernsey Financial Services Commission. Guernsey registered company number: 6512.

Dixcart Management (IOM) Limited is licensed by the Isle of Man Financial Services Authority.