Capital Gains and Property Transfer Tax in Malta

Introduction

The transfer of immovable property in Malta attracts an amount of tax which is imposed on the person transferring the property to the other party.  In this regard the term “transfer” includes any assignment or cession of any rights over property.[1]

Upon the transfer of immovable property, the transferor will either be subject to ‘property transfer tax’ (PTT) or ‘income tax on capital gains’ (CGT); each form of tax is calculated differently, as will be seen below. Property transfer tax and capital gains tax are both regulated by the Malta Income Tax Act. [2]

Property Transfer Tax

Property transfer tax (PTT) is the default transaction-based tax that affects transfers of any real right over immovable property from one party to another. It is calculated at the rate of 12% of the transfer value of the immovable property involved in a given transaction.[3] The transfer value of a property is the higher of the following: the market value of the property or the consideration paid or payable for the transfer.

Exceptions

The law provides for different rates of tax in certain defined cases:

1. 12% tax on the profits[4] made from the transfer. This applies in the case where:

1. The transferor had acquired the property by inheritance after the 24^th November 1992; or
2. The transferor had acquired the immovable property through a donation made more than five years before the date of the transfer in question.[5]

1. 7% tax on the entire transfer value in the case of the transfer of immovable property that was inherited by the transferor before the 25^th November 1992.[6]

Exemptions

Some transactions are exempt from being subject to property transfer tax. These include:

1. Donations made by a person to his relatives[7] or to a philanthropic institution;[8]
2. Transfers of property that had been owned and occupied by the transferor, where this property was used as his residence throughout the period of three consecutive years immediately preceding the date of the transfer. This exemption will come into effect if the property is disposed of within twelve months from the date on which the seller has vacated the premises;[9]
3. The assignment of property between spouses consequent to a judicial or consensual separation, or a divorce;[10]
4. The assignment of property that formed part of the community of acquests between the spouses, or was otherwise owned in common between them;[11]
5. The transfer of property from one company to another where the companies are deemed to form part of the same group of companies; or where they are controlled and beneficially owned directly or indirectly to the extent of more than 50% by the same shareholders.[12]
6. The transfer of property by a company to its shareholder[13] in the course of its winding up, or in the course of a distribution of assets, if he owns not less than 95% share capital and voting rights of the company, directly or indirectly.[14]

It is important to note that where a person transferring immovable property is exempt from paying property transfer tax, this exemption is final and he will not be subject to any other tax under the Income Tax Act.[15]

Opting out of Property Transfer Tax

Although PTT ordinarily regulates all transfers made on or after the 1^st November 2005, there are cases where the law allows the possibility of opting out of property transfer tax. This is not equivalent to an exemption from paying tax[16] - on the other hand, the person opting out of PTT may be subject to CGT.[17]

1. Opt-out subject to an express declaration of the transferor

An opt-out is subject to an express declaration of the transferor made on the deed of the transfer in the following cases:

1. In the case of a transfer made less than seven years after the date of the acquisition of the immovable property, if the transferor chooses to include a declaration to the effect that property transfer tax is explicitly being excluded in the publication of the deed of transfer;
2. In the case of a transfer of immovable property that is situated within a special designated area, if the transferor was the owner of the property when the area within which the property is situated first became a special designated area if the transferor chooses to include a declaration to the effect that property transfer tax is explicitly being excluded in the publication of the deed of transfer – this opt out may only be made if the transfer is the first transfer of that property situated within that specific special designated area. Any subsequent transfer will be subject to property transfer tax[18]
3. In the case of a transfer where the property was co-owned by two individuals immediately prior to the transfer and the transfer is being made by one of the co-owners to the other – provided that in the original deed of acquisition of the property in question, the co-owners must have declared that the property was being acquired for the purpose of establishing therein, or constructing thereon, their sole ordinary residence. In this case the transferor has to include a declaration to the effect that property transfer tax is explicitly being excluded in the publication of the deed of transfer;
4. In the case of a transfer of property to the Government of Malta where that property is expropriated by the Government of Malta;[19]
5. In the case of a transfer of property that had been used in a business for a period of at least three years, if that property is replaced within one year by new property which will solely be used for a similar purpose of the business. This will not apply if the replacement property is disposed of, or ceases to be used in the same business, within a period of two years starting from the date on which the new property was acquired.[20]

1. Automatic opt-out

The law automatically imposes an opt-out of property transfer tax in the case of a transfer of immovable property by means of a judicial sale by auction, or in the course of a winding up by the Court.

There are two other situations where opting out of property transfer tax is not entirely dependent on the choice of the transferor, however in these cases there is a heavy dependence on the input made by the transferor where:

1. The transfer of property is made by a person who is not resident in Malta if this person is resident for tax purposes in another country if the transferor produces to the notary who is publishing the deed of transfer a statement signed by the tax authorities of the country of that person’s residence – this statement should confirm that person’s residence in that country and also that it certifies that the person is subject to tax on gains or profits derived from the transfer of immovable property situated in Malta. This statement will be attached to the deed, and an authenticated copy will be sent to the Commissioner for Revenue accordingly;
2. The transfer of property is made after the 1^st November 2005 in accordance with a lease agreement made prior to the 1^st November 2005, where the agreement included the option of purchase of the property at an agreed price.[21]

Capital Gains Tax

Capital gains tax (CGT) is a tax based on profits and other gains made throughout a calendar year. It is available instead of property transfer tax in specific instances where:

• the transferor is allowed to opt for CGT; or
• CGT is rendered automatically applicable on the transferor in virtue of the law.[22]

If this specific tax regime is applicable, the taxable amount is the selling price with the deduction of:

• the cost of acquisition;
• the inflation element;
• any ground-rent paid on the property for which a deduction is not due to the taxpayer under any other provision of the law;
• maintenance;
• improvements and other expenses that have increased the value of the immovable property since it was acquired; and
• expenses related to the transfer.[23]

The final taxable amount is added up to the person’s total taxable amount, which would then be subject to a progressive rate of tax of up to 35%.[24]

Exemptions

As in the case of property transfer tax,[25] an exemption from the payment of income tax on capital gains is afforded to the person transferring property where the transfer is a donation to:

• that person’s spouse, descendants and ascendants in the direct line and their relative spouses, or in the absence of descendants, to his brothers or sisters and their relative descendants; or
• a philanthropic institution approved for the purposes assigned in the Income Tax Act,[26]

For the purposes of ascertaining income tax on capital gains, a transfer does not include a contract of partition where no form of owelty is due to any of the co-partitioners. A subsequent transfer of any property by a co-partitioner would result in the cost of acquisition being deemed to be the cost of acquisition of the property in question at the time of the acquisition by the said co-partitioner.[27]

If an assets used in a business for a period of at least three years is subsequently transferred and replaced within one year by an asset used soeley for a similar purpose in the business, any capital gains realised on the transfer will not be taxed, however the cost of acquisition of the new asset will be reduced by the said gain.[28]

Another exemption is afforded in the case where an asset is transferred from one company to another company if the two companies involved in the transfer are deemed to form part of the same group of companies, or if they are controlled and beneficially owned directly or indirectly to the extent of more than 50% by the same shareholders. In this case it will be deemed that no loss or gain would have arisen from the transfer.

Exceptions

Where a person transfers immovable property that had been acquired through a donation in the five years preceding the transfer in question, income tax on capital gains will only be charged on the gain ascertained, i.e. the profit in excess of the acquisition value at the time of the original donation. On the other hand, if the property is sold after the lapse of five years from an acquisition through donation, the cost of acquisition will be deemed to be the value of the property as declared in the deed of the donation.[29]

When it comes to the transfer of immovable through a deed of exchange, it will be considered as though there were separate deeds of transfer between the parties to the deed.[30]

[1] Article 5A (2) (a), Income Tax Act.

[2] The Income Tax Act (Chapter 123 of the Laws of Malta).

[3] Article 5A(5)(a) of the Income Tax Act.

[4] This refers to the excess, if any, of the transfer value over the acquisition value of the property.

[5] Article 5A(5)(b) of the Income Tax Act.

[6] Article 5A(5)(c) of the Income Tax Act.

[7] These persons are limited to the spouse of the transferor, his descendants or ascendants in the direct line (or their relative spouses), or to his brothers or sisters in the absence of any descendants in the direct line.