The Budget Speech 2017

The Budget Speech for the 2017 Budget took place on17 October 2016 and includes the proposed amendments to Malta’s tax and duty legislation. A number of the salient proposed amendments are outlined below.

Occupational retirement schemes

The majority of pensioners currently rely on their state pension (ie: Pillar 1 Pension or as it is technically known, as the social security contributory pension) as pension income. It is therefore somewhat concerning, that the Pillar 1 Pension, in its current form may not be sustainable and may not, on its own, provide an adequate quality of life for retirees. In fact there have been a number of proposals since 2004 to attempt to remedy the situation, one of which involved introducing a voluntary personal pension together with certain fiscal incentives (ie: Pillar 3 Pension).

The 2015 Pension Strategy Group established five principles for the Maltese pension system – one of which was that ‘the State pension should be a solid foundation, but not the only source of retirement income’.

Pension rules for an Occupational Retirement Scheme (ORS) were recently introduced by MFSA and it does not seem that there has been any significant take up as yet. In order to kick-start the introduction of ORS’s by employers, the Pension Strategy Group recommended the introduction of fiscal incentive measures to trigger the take-up of ORS’s. A technical committee was set up and its recommendations were presented to the government and announced in the 2017 Budget Speech.

The general principle of an ORS is that an employer introduces a pension scheme for their employees to contribute towards. An ORS can be a closed scheme – that is, one established specifically by an employer for their employees, or an open scheme – that is, one established by scheme providers and which is open to any employer.

While there is no obligation for an employer to introduce an ORS there are good reasons for them to do so, these being:

  • To attract experienced employees in a very competitive job market. Retirement plans can become a key part of the total compensation package.
  • To retain and motivate employees. An employer reduces staff turnover due to the ORS that they are offering.
  • To increase their competitive advantage through human resources. Employers retain their best and brightest talent thus avoiding costs related to bringing on board new employment and to recruitment, training, etc.
  • Social benefit: an ORS encourages employees to save for their future since social security retirement benefits alone may not be an adequate source to support a reasonable lifestyle for retirees.

To date it has not been attractive from a fiscal perspective, for employers to set up an ORS. In terms of current tax legislation any amount paid into an ORS by an employer is not an allowable tax deduction for such employer (unless approved by the commissioner). It is therefore more tax efficient for the employer to remunerate/reward an employee by granting an increase in salary rather than by making a contribution to an ORS. Also, currently any contributions made by any employer for the benefit of the employee, should be subject to Malta tax as a fringe benefit at the level of the employee.

As mentioned in the Budget Speech, measures will be introduced in order to encourage contributions to an ORS by employers resulting in such contributions being considered as a tax deductible expense at the level of the employer. In addition, employers should also be entitled to a further tax credit amounting to €150 for each €1,000 contributed.

Furthermore, it has been proposed that the contribution to an ORS by an employer should not constitute a taxable fringe benefit for the employee. In addition the employee will be allowed a tax rebate of up to a maximum of €150 per annum against their income when investing in an ORS.

Employers’ associations will be permitted to administer these collective ORS’s on their members’ employees’ behalf, thus facilitating the take up of these fiscal incentives by small businesses and the self- employed.

Malta Stock Exchange

In terms of current legislation individuals are exempt from tax on dividend income in excess of prescribed thresholds. As a result, the tax on the underlying company profits being distributed is not available as a credit/refund at individual shareholder level. However with effect from 2017, shareholders who do own not more than 0.5% of the nominal share capital and dividend rights of a company listed on the Malta Stock Exchange will be entitled to declare the relevant dividends and claim a credit/refund of the underlying tax paid by the distributing company on profits generated on or after 1 January 2017.

The government also intends promoting investment by the public on the Malta Stock Exchange whilst encouraging entrepreneurs to raise finance through stock exchange listings. As part of this initiative the Minister has announced a number of fiscal incentives that include:

  • An annual tax credit of up to €250,000 in terms of a Risk Investment Scheme that shall be afforded to persons who invest in small or medium enterprises (‘SMEs’) that are registered on an alternative trading platform such as ‘Prospects’ or in funds that invest in a number of SMEs that are so registered, and
  • The reintroduction of the tax exemption on capital gains realised upon the sale of shares to the public through a listing on the Malta Stock Exchange. Under current regulations, such a gain would presently be taxable at the rate of 15%. A similar exemption shall also be introduced in respect of the sale of shares to the public through a listing on an alternative trading platform. The benefit afforded in this case may however be dependent on the percentage shareholding offered to the public.

The Minister also announced that the above measures are intended to complement a number of initiatives that the Malta Stock Exchange will be introducing.

Malta Enterprise

A number of schemes will be introduced by Malta Enterprise, including:

  1. Financial assistance of up to €25,000 to help disadvantaged individuals to set up a business.
  2. A tax credit amounting to between 25% and 45% of the expenses incurred on a research project.
  3. A tax credit amounting to a maximum of 30% of the expenses incurred in the development of digital games with a cultural them.
  4. A scheme consisting of a tax credit in relation to costs incurred on renovation works undertaken on hotels and restaurants, capped at €200,000 and €50,000 respectively.

Stamp duty on business transfers

During 2017, the rate of duty applicable to a qualifying transfer of a business by parents to their children will be reduced from 5% to 1.5%.

Stamp duty exemption for first time buyers

Individuals buying their first residential property currently benefit from a stamp duty exemption on the first €150,000 paid. This exemption will be extended to acquisitions made in 2017.

Stamp duty reduction on Gozo properties

Persons who acquire a residential property in Gozo by the end of 2018 will benefit from a reduction in the stamp duty rate from 5% to 2% provided that the promise of sale agreement is registered with the Inland Revenue Department by the end of 2017.

Income tax for pensioners

Pensioners over the age of 61 in receipt of pension income will be exempt from income tax on pensions of up to €13,000 per annum. This applies to social security, treasury as well as other local or foreign pensions. This exemption will be introduced over a period of two years.

Married couples in receipt of a pension will benefit from an additional exemption of €1,000 per annum on their total income, introduced over two years.

Conclusion

The Budget Speech includes high level announcements and proposals which are typically implemented through detailed legislative amendments and tax guidelines, some of which have yet to be published.

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