November 1, 2023
Malta will not be introducing any component of Pillar Two in 2024
The Finance Minister has announced that, in 2024, Malta will not be introducing any component of the Organisation for Economic Co-operation and Development (OECD) Pillar Two Initiative. The Minister added that Malta will be applying the derogation afforded by Council Directive (EU) 2022/2523 of 14 December 2022 — more commonly known as the Minimum Tax Directive — and therefore will not be introducing the Income Inclusion Rule (IIR) or Undertaxed Profits Rule (UTPR) in 2024. Similarly, Malta will not be introducing a qualified domestic top-up tax (QDTT) in 2024.
The Minister said that Malta will be following global developments closely and will make other decisions when the need arises. No major changes to the existing tax system are expected and therefore the existing tax system (the full imputation system especially) will continue to apply. Meanwhile, work on creating grants and Qualified Refundable Tax Credits compatible with rules imposed by the European Union (EU) and the OECD continues. The Minister said that while, in the transitory phase, an increase in the tax burden of certain companies may not be entirely excluded, the Government of Malta will ensure that Malta remains attractive to foreign investors.
The Minimum Tax Directive
By way of background, the Minimum Tax Directive implements across the EU the Global Anti-Base Erosion Model Rules (GloBE Rules), which have been agreed upon by the OECD/G20 Inclusive Framework. The GloBE Rules seek to impose a global minimum tax of 15% on certain profits of multinational groups — and large-scale domestic groups in the case of the Minimum Tax Directive — that have an annual revenue of €750 million or more. The GloBE Rules aim to achieve this via a set of interlocking rules (the IIR and UTPR) that impose a top-up tax on excess profits where the corresponding income has an effective tax rate below the agreed 15% minimum rate.
Under the IIR, a parent entity would be obliged to compute and pay its allocable share of top-up tax in respect of excess profits derived by low-taxed constituent entities in which it holds an interest. Conversely, the UTPR acts as a backstop to the IIR through which a constituent entity of a group that is subject to the GloBE Rules would have an additional cash tax expense equal to its share of top-up tax that was not charged under the IIR vis-à-vis excess profits derived by low-tax constituent entities of the same group.
The Minimum Tax Directive seeks to introduce a consistent approach across the European Union and requires all Member States to introduce both the IIR and UTPR. The IIR shall apply for fiscal years beginning from 31 December 2023, whereas the UTPR shall apply for fiscal years beginning from 31 December 2024.
In line with the election made by Malta, by way of derogation, Member States that are home to not more than 12 ultimate parent entities of groups may opt to delay application of the IIR and UTPR for a maximum period of six consecutive years. On this point, the Minimum Tax Directive provides that if an ultimate parent entity is located in a Member State that has delayed the application of the IIR and UTPR, then "the Member States, other than the one in which the ultimate parent entity is located, shall ensure that the constituent entities of that [ultimate parent entity's] group are subject, in the Member State in which they are located, to the UTPR top-up tax amount allocated to that Member State for the fiscal years beginning from 31 December 2023."
In addition to the IIR and UTPR, the GloBE Rules contemplate another mechanism through which top-up tax may be collected. Mirroring the optionality afforded in the GloBE Rules, the Minimum Tax Directive gives Member States the option to introduce a QDTT. Under such a QDTT rule, Member States get the chance to impose a top-up tax on the excess profits of all the low-taxed constituent entities located in their jurisdiction before applying the IIR and/or UTPR elsewhere.
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Malta), Msida
Ernst & Young LLP (United States), Maltese Tax Desk, New York
Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor