The recent Directive (EU) 2022/2523 adopted by the Council of the European Union on 14 December 2022 (the “Directive”) introduces a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups. The Directive, which was set to be transposed into domestic legislations by Member States by 31 December 2023, includes provisions reflecting the Model Rules issued by the OECD/G20 Inclusive Framework on BEPS (Base Erosion and Profit Shifting) such as:
- 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.
- Undertaxed Profits 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.
- Qualified Domestic Top-up Tax (“QDTT”) – Member States may implement a domestic top-up tax which applies to low taxed entities located in its territory. It therefore allows to tax such low taxed entities, instead of them being taxed at the level of the parent entity. Where a domestic top-up tax is levied, the amount of the top-up tax by the parent entity under the IIR is reduced by the amount that was charged.
Key Legal Issues
- EU Directive 2022/2523 introduces global minimum tax rate for multinational groups.
- Malta delayed the application of certain provisions but imposed filing obligations.
- Maltese entities must nominate group members abroad to fulfil the filing obligations.
Malta’s Delayed Application
On 20 February 2024, Malta implemented the Directive through the publication of Legal Notice 32 of 2024. Malta has opted for a delayed application of the IIR and UTPR, exercising its right under Article 50 of the Directive. This means that Malta will not apply these rules for six consecutive fiscal years beginning from 31 December 2023. However, Malta is obligated to transpose certain provisions of the Directive into its domestic legislation to ensure its proper functioning. These regulations include administrative provisions, transition rules, and final provisions.
Filing Obligations
Despite the delayed application of the IIR and UTPR, Malta imposes filing obligations on constituent entities located in Malta that are part of a multinational enterprise groups in scope of the Directive. These entities are required to file a top-up tax information return with the Commissioner for Tax and Customs. However, due to the delayed application of the operative provisions of the Directive, as outlined above, such return cannot be filed in Malta. Instead, ultimate parent entities of in-scope multinational groups in Malta must nominate a designated filing entity in another Member State or a third country to fulfil reporting obligations. The obligation to inform the Commissioner for Tax and Customs of the identity of the filing shall entity remain in force during the delay period, requiring local constituent entities to provide necessary information to ensure compliance with the Directive.
What this means for you
The Directive introduces significant tax reforms affecting the businesses operating within the European Union as part of multinational enterprise groups. Malta's decision to delay the application of certain rules offers temporary relief, but compliance remains essential. Filing obligations persist, requiring potential engagement with designated entities in other Member States or third countries. It's imperative for EU businesses to stay informed to effectively navigate the regulatory landscape and ensure adherence to evolving tax regulations.
How we can help
Navigating the complexities of the EU Directive 2022/2523 and Malta's specific tax regulations requires expert guidance. Our law firm, equipped with a team of seasoned international tax advisors, stands ready to assist. We offer comprehensive support in understanding and complying with the evolving taxation landscape. From interpreting the provisions of the Directive to strategizing for its delayed application, we provide tailored solutions to ensure your business remains compliant and optimally positioned within the changing regulatory environment. Trust our expertise to guide you through these intricate legal matters and safeguard your international tax interests.
