Malta, as a member of the EU and a state committed to transparency, implements number of international tools designed for exchange of information in financial matters. Below we present the most important regulations.
1. Savings Directive
Under the Savings Directive (2003/48/EC) all member states are ultimately expected to automatically exchange information on interest payments made by paying agents established in their territories to individuals being residents in member states. In Malta the Directive was implemented fully, without exercising any options and without any additional information required (S.L. 123.74).
The scope of the Directive is relatively broad and it embraces definitions of interest payments (the material scope), a paying agent and a beneficial owner (the personal scope). Article 6, which defines its material scope is very broad and covers:
(a) interest paid or credited to an account, relating to debt claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and, in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures; penalty charges for late payments shall not be regarded as interest payments;
(b) interest accrued or capitalised at the sale, refund or redemption of the debt claims referred to in (a);
(c) income deriving from interest payments either directly or through an entity referred to in Article 4(2), distributed by:
(i) an undertaking for collective investment in transferable securities (UCITS) authorised in accordance with Directive 85/611/EEC,
(ii) entities which qualify for the option under Article 4(3),
(iii) undertakings for collective investment established outside the territory referred to in Article 7;
(d) income realised upon the sale, refund or redemption of shares or units in the following undertakings and entities, if they invest directly or indirectly, via other undertakings for collective investment or entities referred to below, more than 25% of their assets in debt claims as referred to in (a):
(i) an UCITS authorised in accordance with Directive 85/611/EEC,
(ii) entities which qualify for the option under Article 4(3),
(iii) undertakings for collective investment established outside the territory referred to in Article 7.
A “paying agent” is the entity responsible for collecting the information and submitting it to the respective authorities. The Directive does not define a paying agent through any catalogue, indicating “any economic operator who pays interests” instead. As a result of this broad definition, the scheme affects banks, registrars, custodians and other financial institutions that make interest payments to individuals in prescribed territories. The Directive may also apply to those who hold or administer money debts and investments in collective investment funds on behalf of individuals or residual entities in a professional capacity such as accountants, lawyers, trustees or nominee companies. These provisions do not extend, however, to foreign branches of economic operators established in Malta.
Trustees, personal representatives and other persons with similar roles in Malta can be paying agents if they are acting as such in a business or professional capacity. A professional person acting on behalf of trustees or personal representatives may be a paying agent if he receives interest or makes interest payments on their behalf. In general, a professional trustee or personal representative qualifies as a paying agent if a beneficiary of the trust or estate is absolutely entitled to the interest as it arises (and that beneficiary is a beneficial owner).
A “beneficial owner” is any individual who receives an interest payment or any individual to whom an interest payment is secured, unless the opposite is has been proven.
Under the Directive provisions, a paying agent is obliged to report to the respective authority in its member state minimum information, consisting of:
(i) the identity and residence of the beneficial owner;
(ii) the name and address of the paying agent;
(iii) the account number of the beneficial owner or, where there is none, identification of the debt-claim giving rise to the interest, and
(iv) information concerning the interest payment (namely, the amount of interest).
Paying agents in Malta must notify the authority within 14 days of the end of the tax year in which they make a reportable payment, unless they have already notified the Commissioner of Inland Revenue in a previous year. Following the said initial notification, the Commissioner of Inland Revenue shall issue a registration certificate which will include a Paying Agent Code. Once the Commissioner of Inland Revenue has been so notified, a report of interest payments needs to be submitted to the Commissioner of Inland Revenue by 28th February of the year immediately following the year in which the interest payments were made.
The competent authority passes the information to the respective authority in the state of residence of the beneficial owner. The communication is automatic and should take place at least once a year within 6 months following the year when the payment was made.
In 2008 the Commission issued a proposal extending the material scope of the Directive to cover investment funds, pensions and innovative financial instruments. In May 2013 ECOFIN has reached an agreement on a mandate to allow the European Commission to negotiate amendments to agreements with third states.
2. FATCA and Intergovernmental Agreements
The Foreign Account Tax Compliance Act (FATCA) was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act of 2010. Its main aim was to keep US persons from hiding income and assets overseas by implementing the system of exchange of information secured by conditional withholding tax. In a nutshell, non-reporting to US authorities would result in imposing withholding tax on US-sourced income.
At the onset of FATCA it was envisaged that all foreign financial institutions around the world would enter into an agreement directly with the US authorities. However, many states have agreed with the US that an intergovernmental agreement (IGA) should be signed instead between a state and the US and, as a result, financial institutions of that state would report information on specified accounts to their respective local authority which will in turn hand this information over to the US tax authority. The model IGA was designed by US Department of the Treasury and published last July. The bulk of it is not, however, open to negotiation.
The material scope of FATCA encompasses dividends, interest, rents, salaries, wages, annuities and other fixed determinable, annual or periodical type income if such payment comes from US source. Under particular IGAs some financial products might be excluded from the scope – e.g. in UK IGA these are, i.a. retirement savings.
Foreign financial institutions, affected by FATCA, were divided into four categories: Custodial, Depository, Investment Entities and Specified Insurance Companies. In general, the act covers these entities which accept deposits in the ordinary course of business, conducting activity in the business of holding financial assets for others, primarily engaged in the business of investing, reinvesting or trading in securities, partnership, interests, commodities, or any interest in such instruments. As a result, the scope of said regulation encompasses e.g. banks, insurance companies that issue cash value products, funds, brokers, dealers, custodians and wealth managers. However, particular IGAs contain lists of entities remaining outside the scope of FATCA, described as “Exempted” or “Deemed-compliant”. These are (based on the UK example) mostly governmental, retirement funds, NGOs and local client based financial institutions.
Malta is in the process of negotiating IGA which is based on the UK model.
3. The Administrative Cooperation Directive
The Directive 2011/16/EU of 15.2.2011 on Administrative Cooperation in the Field of Taxation and Repealing Directive 77/799/EEC unifies the procedure in case of exchange of information which is foreseeably relevant to the administration and enforcement of the domestic tax law. The act was implemented into Maltese legal system through S.L. 123.127 Cooperation with other Jurisdictions on Tax Matters and following L.N. 472 of 2012 amendment.
The Directive prescribes three procedures for exchange of information: on request, automatic and spontaneous. Information on request covers all types of information subject to exchange under the Directive and is made available to the competent authority of the other member state upon a reasoned motion. The request may be dismissed in case the requested authority finds an administrative enquiry not necessary.
Mandatory automatic exchange of information encompasses income from employment, director’s fees, life insurance products not covered by other EU legal instruments on exchange of information and other similar measures, pensions and ownership of and income from immovable property, for taxable periods from 1 January 2014. This exchange should take place once a year, within six months following the end of the year immediately preceding the year of assessment during which the information became available. Under Maltese implementing regulation, this procedure comes into force as of 1 January 2015.
Finally, spontaneous exchange takes place when:
(a) the competent authority of one Member State has grounds for supposing that there may be a loss of tax in the other Member State;
(b) a person liable to tax obtains a reduction in, or an exemption from, tax in one Member State which would give rise to an increase in tax or to liability to tax in the other Member State;
(c) business dealings between a person liable to tax in one Member State and a person liable to tax in the other Member State are conducted through one or more countries in such a way that a saving in tax may result in one or the other Member State or in both;
(d) the competent authority of a Member State has grounds for supposing that a saving of tax may result from artificial transfers of profits within groups of enterprises;
(e) information forwarded to one Member State by the competent authority of the other Member State has enabled information to be obtained which may be relevant in assessing liability to tax in the latter Member State.
Moreover, administrative cooperation may take forms of simultaneous controls or presence in administrative offices and participation in administrative enquiries.
