CAPITAL GAINS TAX
Property not Taxed at 12%
Instead of being taxed at 12% some transfers are taxed under the old system (as trading profits or capital gains). A transfer of property is taxed under the old system rather and not at 12% when:
o it was made up to 31 March 2006 and satisfies certain conditions - see here;
o it is made within 7 years from the date of acquisition - see here;
o the property is situated in a special designated area - see here;
o it is a transfer of a share of a property made between two co-owners (engaged couple) under certain conditions - seehere;
o it is a transfer of property to the Government of Malta in terms of the Land Acquisition (Public Purposes) Ordinance - see here;
o it is made by means of a judicial sale by auction or in the course of a winding up by the Court - see here;
o the property had been used in a business for at least 3 years and is going to be replaced within one year by property used solely for a similar purpose of the business - see here;
o the property is owned by a person who is not resident in Malta - see here;
o the property is not situated in Malta - see here;
Up to 31 October, 2005, i.e. the day of the Budget speech, some persons had already entered into promise of sale agreements, unaware of the subsequent change in the method of taxation of such transfers. For this reason transitory provisions were introduced to give such persons the option to be taxed under the old system.
This election was possible only under the following conditions:
o notice of the promise of sale or transfer was given to the Commissioner by not later than 22 November, 2005; and
o the transfer was made between 1 November, 2005 and 31 March, 2006 for the same consideration and at the same terms provided for in that promise of sale or transfer; and
o notice of the transfer was given to the Commissioner by not later than 15 May, 2006; and
o the election was recorded in the contract.
Whoever transfers property within seven years from acquisition (except acquisition through inheritance) may opt to be taxed under the old system instead of the final tax rate of 12%.
Click here for more information on the Final Tax System.
4. According to the Income Tax Act, when property is transferred between companies within the same group, the transfer is exempt from tax. If the property is now transferred to another company outside the group and more than seven years have passed, can the option (to be taxed under the old system) be taken?
When a company transfers property outside the group it shall be deemed to have acquired the property on the date on which the property had previously last been acquired by a company by means of a transfer that did not qualify for the intra-group exemption.
Example: In 1996 company A transferred property to company B which does not form part of the same group. This transferis not exempt from tax.
In 2004, company B transferred the property to company C, a member of the same group. This transfer is exempt from tax.
Now company C, in 2006, transfer the property to company D which is not a member of the same group. Are the seven years considered to have elapsed?
Answer: Although the property has been in the hands of company C for less than seven years, actually more than seven years have elapsed since the last taxable transfer (i.e. when the property was transferred from A to B). Company C does not have the option to have the transfer taxed at 12%.
If the properties do not form part of the same project you can choose to be taxed under different systems.
When the properties form part of the same project, the method of taxation of the first sale shall apply also to all other property sales made within 7 years from acquisition.
“Project" means property that has been developed by the owner into more than one transferable unit or divided for transfer into more than one transferable portion.
Example: I purchase land and build three apartments thereon. After two years I sell the first apartment. When I sell this first apartment I can choose (because 7 years from the date of acquisition have not passed) between the 12% system or the old system (i.e. tax on the trading profits, in terms of article 4). If I choose the old system for the first apartment I would also be choosing the same system of taxation for the other two apartments as long as I sell them within 7 years from when I acquired the land. If I do not make that choice for the first apartment I cannot make that choice for the other two apartments either.
Transfers made before 1 March, 2006 will not affect the choice that can be made regarding sales made after that date, because the choice of the method of taxation is tied to the first sale made on or after 1 March, 2006.
If you own property situated in a special designated area, and you were the owner of that property on the date when that area first became a special designated area, you can choose to be taxed at 12% of the transfer value or under the old system (as trading profits or capital gains, as the case may be).
In the case of special designated areas, such option is not restricted to seven years. However, the option must be taken when the first transfer of property situated in that special designated area is made. The decision that you make in respect of the first transfer will be applied to all the subsequent transfers of property situated in that area, even where the seven years have elapsed.
If you were not the owner of the property when that area became a special designated area, i.e. if you acquired the property when the area was already a special designated area, you do not have the option. However, you will still have the option if seven years since acquisition have not yet elapsed.
Selling a property situated within a special designated area before 1 March, 2006 will not affect the choice that you can make regarding sales effected after that date, because the option is tied to the first sale made on or after 1 March 2006.
The party selling its share may opt to be taxed at 12% or under the old system. If one opts for 12% no action is required.
If the transferor wishes to be taxed under the old system (i.e. on the capital gain, in terms of article 5) an important condition must be satisfied: the engaged couple must have declared, in the deed of acquisition, that they had acquired it for the purpose of establishing therein or constructing thereon their sole ordinary residence.
When property is transferred to the Government of Malta, the transferor may opt to be taxed under the old system rather than at 12%. This choice can only be exercised if the following two conditions are satisfied:
o the property had been acquired by the Government of Malta in terms of the Land Acquisition (Public Purposes) Ordinance;
o the Government had taken possession of that property, or an Order of the President had been issued therefor, before 1 November, 2005, and this fact is evidenced by a letter signed by the Commissioner of Land and attached to the deed of transfer. The transferor must produce such letter to the notary publishing the deed, who on his part will attach it to the deed and deliver a certified copy thereof to the Commissioner.
In this case the transfer is taxed in accordance with the old system. One may not opt to be taxed at 12%.
Yes. When you transfer property that had been used in a business and replace it by another property, if the conditions regarding roll-over relief are satisfied, you may choose to be taxed under the old system and benefit from tax relief in terms of article 5(8) in accordance with the old system.
The election not to be taxed under the new system must be made by means of a declaration to the notary and recorded in the deed.
Note that, in accordance with article 5(8) of the Income Tax Act, this tax relief is not an exemption but a postponement of the payment of tax. Therefore, if you choose to benefit from the roll-over relief, you would be binding yourself to pay the tax saved later on, at the time of a subsequent transfer.
Example: You have used a property as a store in a business for more than 3 years. Later, you sell the store. to acquire a larger one. The transfer of the first store qualifies for relief as long as it is made within 12 months from the date of acquisition of the second one.
You may, after some time, again sell the second store. Let us say that the second transfer does not qualify for roll-over relief – for example, because it is not replaced by another store. In that case, both the tax on the capital gain in terms of article 5, as well as the tax on the capital gain that was saved in the first transfer, has to be paid when the second transfer is made.
Therefore, if you choose not to be taxed at 12% on the first transfer in order to claim the tax relief, the second transfer will not be taxed at 12% either, but under the old system. There will be a claw-back of the tax that had not been paid on the first transfer.
Benefiting from roll-over relief does not mean being exempted from the payment of provisional tax. When a transfer qualifies for roll-over relief, the 7% provisional tax must still be paid, unless there is an authorisation by the Commissioner to the contrary.
When a person has the right to the option, and would like to exercise it, he has to declare his intention to the notary who will record on the deed that the final tax system (at 12%) will not be applied to the transfer.
It is the transferor's duty to disclose the correct information to the notary in order to ascertain that there is, in fact, the right to choose. Without a clear declaration to this effect on the deed, no election may be made. The election may not be made after the publication of the contract.
A transferor who is not a resident of Malta may be subject to tax on the gain in his country of residence. Normally he would have the right to claim double taxation relief in his country of residence. However, it is possible that the relief would only be granted if the tax paid in Malta were a tax on the gain.
A non-resident may therefore choose to have the transfer taxed under the old system rather than at 12%. To qualify for this right, the non-resident has to produce to the notary a statement signed by the tax authorities of the country of that person's residence confirming that person's residence in that country and certifying that he is subject to tax in that country on profits derived from the transfer of immovable property situated in Malta. In this case the notary must attach the statement to the deed and deliver an authenticated copy to the Commissioner.
In terms of article 10 of the Capital Gains Rules, 1993 the notary must request the authorisation of the Commissioner before publishing the deed of transfer of property by a non-resident. The Commissioner's authorisation may be subject to certain conditions.
No, the transfer of property situated outside Malta is not taxed at 12% but in terms of article 4 (if it is a trading activity) or in terms of article 5 (if it is a capital gain). The changes that were introduced from 1 November 2005 onwards apply only to property situated in Malta.