Malta used for aggressive tax planning, European Commission says in 2017 report

Some of Malta’s tax rules may be used in structures of aggressive tax planning according to the European Commission’s country specific report for Malta in 2017, published today [PDF].

The EC the absence of certain anti-abuse rules and the absence of withholding taxes on dividends, interests and royalties payments vis-à-vis third countries “are features of the tax system which may facilitate aggressive tax planning.”

The EC said that the very high level of inward and outward foreign direct investments (FDI) positions, the share of those FDI held by so-called ‘Special Purpose Entities’, but also the high level of dividends or royalty payments as percentage of GDP suggest that the country’s tax rules are used by companies that engage in aggressive tax planning.

Aggressive tax planning consists in taking advantage of the technicalities of a tax system or of mismatches between two or more tax systems for the purpose of reducing tax liability. A special purpose entity is a legal entity that has little or no employment, operations or physical presence in the tax jurisdiction where it is located. It is related to another corporation often as a subsidiary, and is typically located in another tax jurisdiction.

“Within this context however, it is important to note that corporate tax initiatives such as the amendment to the Parent-Subsidiary Directive or the Anti-Tax Avoidance Directive, will strengthen member states’ anti-abuse framework and boost tax transparency, for example through the automatic exchange of information on tax rulings or on country-by-country reports,” the EC said.

It also noted that Malta had taken steps to adjust some of its tax rules facilitating aggressive tax planning and that the country had taken measures to close the existing patent box regime.

€900 million gaming industry

Malta’s gaming sector has racked up a total gross value added of over €900 million, according to the European Commission’s latest country report for the island member state.

Malta benefits from a first-mover advantage in the gaming sector having been the first EU member state to regulate the remote gaming market in 2004.

Across the EC, the market generates an estimated turnover of €13.3 billion but Malta has developed a significant comparative advantage due to its accumulated experience and expertise and an attractive regulatory and tax environment.

In 2016, the industry was employing over 6,000 workers and growing: the half-yearly data shows that this was already 1,300 more workers than in 2015.

Gaming tax revenue in 2015 was €55 million, while towards the half of 2016 this was already at €28 million, representing 5% of Malta’s total taxation revenue on production and imports.

Property prices

At the same time, the demand for housing remains strong thanks to strong net immigration since 2012, in part owing to foreign investment settling in Malta.

“The steady upward trend of mortgage loans points to a sustained demand for housing. The share of buy-to-let purchases is also on the rise. Housing demand has also been encouraged by fiscal policy, such as incentives for first-time buyers, schemes to attract high net-worth individuals as well as the citizenship programme,” the EC said in it semester report.

The average of issued permits over 2016 has recovered to its 2009 levels. The volume of property transactions was also very dynamic in 2014 and 2015. Current estimates show that the excessive price growth prior to 2008 has corrected and there does not appear to be overvaluation of house prices, the EC said.

This also reflects the strong income growth in recent years. But while housing demand appears to be growing at a steady pace, income growth is projected to slow down.

“The main risks are faced by households, in view of their increasing ratio of debt to income and a high debt service ratio, and by banks, in case of a sudden drop in the value of their collateral.”