Building on the Pillar II work of the OECD Inclusive Framework, the implementation of the Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union (“Minimum Tax Directive”) is set to transform in 2024 the corporate tax landscape in Europe, including Malta.
The Pillar II / Minimum Tax Directive introduces a 15% minimum effective tax rate for multinational groups with consolidated revenue exceeding globally €750 million. EU Member States are mandated to implement the Minimum Tax Directive rules by the 31st of December 2023, with the Income Inclusion Rule (IIR) taking effect from the 31st of December 2023 and the Undertaxed Profits Rule (UTPR) from the 31st of December 2024.
Global Minimum Tax in a Nutshell
Minimum Tax Directive stipulates a minimum tax for multinational corporate groups that do not pay globally income tax at an effective rate of at least 15%. It introduces two main mechanisms:
- Income Inclusion Rule (IIR) - Under this rule, the minimum tax is paid at the level of the parent entity, in proportion to its ownership interests in those entities that have low taxed income.
- Under-Taxed Payments Rule (UTPR) – it comes into play when not all top-up tax is allocated under an IIR (or for instance if there was no IIR in the relevant jurisdiction); in such case the top-up tax may be collected by jurisdictions where the group is present, other than the jurisdiction of the parent entity.
Malta Delays Implementation
On the 27th of October 2023, Minister of Finance Finance Clyde Caruana announced that Malta will defer the adoption of Minimum Tax Directive rules until the 31st of December 2029, as permitted by the Minimum Tax Directive. Malta's existing corporate tax system, featuring the full imputation system and associated tax refund rules, will remain unchanged.
Nonetheless, the Minister of Finance has initiated that, in the interest of keeping pace with evolving international tax rules, a reassessment and reformulation of Malta's tax system to maintain competitiveness and sustainability. The Minister alluded in his speech to a potential transitional period in the upcoming years, acknowledging a potential slight increase in overall corporate taxation. However, the government is steadfast in its commitment to preserving Malta's appeal as an attractive and competitive destination for investors.
Key Legal Issues
- The Minimum Tax Directiveintroduces a 15% minimum effective tax rate
- The rules will apply to multinational groups with consolidated revenue exceeding €750 million.
- Malta will defer the adoption of operational provisions of the Minimum Tax Directive until the 31st of December 2029.
What this means for you
Despite delaying its application in Malta, the Minimum Tax Directive will affect all in-scope Multinational Entities that operate in the EU. Such organizations will need to ensure that they can meet globally the additional reporting and compliance challenges under the new laws.
How we can help
Our team of experienced international tax advisors can help you to assess the operation and financial impact of the Minimum Tax Directive on your organization. We can assist you to identify the accessibility and quality of the requisite data you are collecting now and indicate the gaps and key risks/improvement areas. We can also help with creating a comprehensive policy to address the challenges and opportunities arising from the implementation of the Minimum Tax Directive.
