Property rental income: 15% final withholding tax, the good news and the choice

Introduction

One of the stated aims of the 2014 / 2015 financial budget of the Government of Malta is to address the issue of undeclared income and the consequent loss of Government revenue on income that is derived from the renting of property. The Minister for Finance is trying to close this loophole through the implementation of a 15% final withholding tax on the gross rental income (Article 31D of the Income Tax Act (Cap 123)). While a tax rate of 15% may undoubtedly appear attractive, certain criteria must be applied in order to benefit from the 15% withholding tax.

Essential criteria

Primarily, the rental income must be derived from a dwelling house, or part thereof, and a garage in conjunction with such dwelling house. Secondly, the tenancy of the dwelling house should not have required a Malta Tourism Authority licence.

A Malta Tourism Authority (MTA) licence is required when a tenant is considered a tourist in terms of the Malta Travel and Tourism Services Act (MTTS). The MTTS states a “tourist” shall refer to any person who travels to a place other than that of his usual environment for less than twelve months and who stays at least one night in the place visited. Should the tenant be in line with the above definition, a property owner will be excluded from applying the 15% final withholding tax on gross rental income.

Types of licences

The MTA can issue two types of licences for residential units, namely the “House on Long Lease Licence” and the “Holiday Furnished Premises Licence” which is mainly targeted at short-lets. The property owner who opts for the “Holiday Furnished Premises Licence” may seek to attain the “Comfort” category by satisfying additional requirements (which generally entails an investment of between €300 to €2,000) and meeting certain health and safety prerequisites such as an onsite fire extinguisher, fire blanket, smoke detector, and emergency lights.

Consequences of MTA licence

By including the MTA licence as one of the conditions that precludes a person from benefiting from the 15% final withholding tax, a large segment of the long-let rental market has been excluded from benefitting from this reduced rate of tax. Typical examples would be long-term rentals to persons who have just arrived in Malta to take up new employment or long-term studies, and therefore fall under the MTTS Act definition of a tourist.

Not only will the landlord be being unable to apply the final withholding tax rate of 15%, but there is also the further consideration that, with an MTA licence, VAT is charged albeit at a reduced 7% on the income derived from letting out the said tourist accommodation.

Amnesty

Understanding that the market catered to what was believed to be a disproportionately large amount of unregulated property owners, the Government has also introduced a measure, whereby those individuals who have failed to declare their rental income, now have the opportunity to rectify their position. This is done by aggregating the rental income derived for the last eight years and followed by the payment of tax based on the weighted average of two years.

Penalties

The Commissioner of Inland Revenue reserves the right to submit any income that is determined to be rental income which was not declared by the tax payer, to be charged at 35% on the gross rental income received. Such tax shall be in addition to any interest and additional tax payable under the Income Tax Acts.

Taxation under Subsidiary Legislation 123.26

The previous application of the income tax considerations was that if one was leasing property on a short-let basis, that is for a period of less than 6 months, one can apply for the part-time self-employed (TA22 form) whilst long-let rentals may apply Subsidiary Legislation 123.26 where one is also specifically allowed to deduct the MTA licence fee contributions. This final withholding tax legislation is currently complimenting the long-let Subsidiary Legislation 123.26 which allows for the deduction of interest allowable, any rent, licence fees, and 20% deduction on the income remaining, with the resultant net amount taxed at one’s applicable income tax rate.

The choice

Property owners who qualify under the provisions of the 15% final withholding tax have the possibility to select whether their rental income will be charged to tax under these provisions or under the Subsidiary Legislation. It is important for property owners to note the type of tenant that they are accommodating and its implications on their tax status since tenants who adhere to the definition of a “tourist” necessitate the need for a Malta Tourism Authority licence.

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