The Blevins Franks Guide To TAXES IN MALTA

The Blevins Franks Guide To TAXES IN MALTA www.blevinsfranks.com Contents Introduction Have you actually left the UK? The 91 day rule... Are you paying tax in the right place? Achieving residence in Malta What about the UK/Malta Tax Treaty? Are your investments tax efficient for you? What about your pension income? What about offshore bank interest? What about your rental income? Who is going to inherit your assets? What about your Will? Summary Rates of Tax Income Tax Scale Rates for 2009 3 4 5 6 6-7 8 8 9 9 10 11 12 13 14 Will you have to pay inheritance tax in Malta? 10 Introduction Moving abroad is something that many Britons yearn to do, and Malta is a popular destination for many of them. Yet how much do you know about the tax implications of moving to Malta? This guide looks at many of the issues facing people moving from the UK to Malta, to raise awareness of the ones that may affect you. Depending on your circumstances, however, there are likely to be things that you can do to minimise the problems, and you may even find that you can reduce your tax liability by moving to Malta! You should always take advice when looking to purchase property in and/or moving to any country, and in particular Malta, where you may be able to benefit from a more favourable tax regime. An adviser with a good understanding of both jurisdictions can help you understand the tax implications of your move and work out how to make your money work for you, protecting it against foreign taxes, and how to make the most of the opportunities available. The Blevins Franks Guide to Taxes in MALTA| September 2009 3 Have you actually left the UK? One of the biggest problems people can have when they decide to move abroad is that although they think they have left the UK, they will actually remain UK resident under the UK domestic tax rules. There is no statutory definition of ‘residence’ in the UK, and the rules have been developed over many years and court cases. Residence is a matter of physical presence in a country, either in terms of time spent there, or the quality of the time spent there, and the quality of your connections with that country, in some cases. The UK has time-based residence rules: if you spend more than 183 days in the UK during a UK tax year, which is a statutory test, or more than 91 days per UK tax year (averaged over four UK tax years) in the UK, you are UK resident. The Blevins Franks Guide to Taxes in MALTA | September 2009 4 The 91 day rule can be misleading and is misunderstood by nearly everybody First of all this ‘rule’ is NOT law and is completely ignored by the UK Courts. The Courts only deal with law and the 91 day calculation, or rule as it’s often referred to, appears in an Inland Revenue publication which HM Revenue & Customs (HMRC) preface by saying that it does not represent the law and is for general guidance only and so cannot be relied upon. Secondly, even if you spend far less than 91 days in the UK each year, you still may not have ‘left’ the UK. You first have to leave the UK permanently for a settled purpose. UK case law is littered with stories of people who claimed to have left the UK, and spent less than 91 days there, but were found by UK Courts to have remained UK tax resident because of the pattern of their lives, and the quality of their connections with the UK. Examples of individuals who were in the UK for less than 91 days, yet were found to have remained UK resident, include Mr Shepherd, the airline pilot who unsuccessfully claimed he was resident in Cyprus; Robert Gaines-Cooper who claimed to be resident in the Seychelles; and Mr Grace, another airline pilot, claiming to be resident in South Africa. The Blevins Franks Guide to Taxes in MALTA| September 2009 The quality of your connections with the UK still count – an individual whose family all live in the UK but who works abroad and commutes back to the UK on some weekends could still well be UK resident. The same could apply if you retain accommodation for your use in the UK; where your family is based, and your business and social connections are. So day counting in itself is not always an accurate guide as to where you are resident. What will your position be if you retain a property in the UK? Could it be argued that your property overseas is much more of a holiday home rather than a permanent home base? Even where you satisfy the domestic residence criteria of Malta, as well as the UK domestic rules, under the terms of the UK/Malta Double Tax Treaty you can only be resident in either country at any one time, and so the Treaty has ‘tie-breaker’ rules to establish where you are resident. It might be dangerous to rely on the tie-breaker rules, as circumstances can change, often from year to year – sometimes all it could take is a bout of serious illness and your residence position could change, and you haven’t taken advice or prepared for it. Also, your interpretation of the rules might not be the same as those of the tax authorities in the country in which you are claiming not to be resident. 5 Are you paying tax in the right place? The opposite can also be true: many people move abroad and continue to wrongly pay tax in the UK, when they should be paying tax in their new country of residence. This can happen particularly where some people just never declare themselves to the Maltese tax authorities at all, assuming that they should continue paying tax in the UK, particularly if they only have UK-source income such as UK pensions and savings income. It can be all very confusing unless you receive specialist advice. People who do this may end up paying more tax than they should be, and had they taken advice before they left the UK, could have put into place tax-efficient structures for their money, saving them taxes and increasing their available income. If you are traced by the authorities in Malta and have not submitted appropriate Maltese tax returns, or have under-declared your income because you are paying tax in the UK and believe that you don’t need to declare the income in Malta, this will be treated very seriously by the Maltese tax inspector. It is treated as tax evasion, however innocently arrived at, giving rise to penalties and interest on any underpaid tax. Declaring that you have paid tax in the UK on income which is actually taxable in Malta will not be considered a defence under Maltese law. However, the good news is that if you set yourself up correctly, you should be paying very little tax in Malta. The Blevins Franks Guide to Taxes in MALTA | September 2009 Achieving residence in Malta There are two methods of achieving residence in Malta. METHOD 1 Registration Certificate As an EU National, you apply for a Registration Certificate and will pay tax on income arising in Malta, on any overseas income that is remitted to Malta, and on any capital gains arising in Malta. The highest tax rate is 35%. Income arising overseas is not taxable, provided it is not remitted to Malta. Overseas capital and overseas capital gains are not taxable even if remitted. You may work in Malta under this method. 6 ... Achieving residence in Malta METHOD 2 The Permanent Residence Scheme This is slightly more bureaucratic than Method 1, but is very favourable from a tax point of view. This scheme entitles you to a flat income tax rate of 15% (otherwise the highest rate is 35%), subject to a minimum annual tax liability (after taking into account any double taxation relief) of €4,150 (approx UK £2,900). The scope of tax is the same as above, i.e. it is calculated on chargeable income and capital gains arising in Malta and on foreign income (excluding capital gains) remitted to Malta. Capital gains, even if remitted, are tax free along with unremitted foreign income. You may not work in Malta under this scheme, though you can work overseas. There are various conditions you need to fulfill to be eligible for this scheme, but principally you must have either: • Assets outside of Malta worth at least €349,000 (approx UK £295,000 in June 2009), or • Be entitled to an annual income of at least €23,000 (approx UK £19,500 in June Within twelve months of taking up residence in Malta, you must either: The Blevins Franks Guide to Taxes in MALTA| September 2009 2009) arising outside Malta. • Buy a flat of at least €69,000 (approx UK £48,000) or a house for €116,000 (approx UK £81,000) - stamp duty amounting to 5% of the higher of the market value or purchase price of the immovable property is payable upon acquisition, or • Rent a residence in Malta of not less than €4,150 p.a. (UK £2,900 p.a.). These properties must be occupied as a main home, and must not be rented out for gain. In addition, you must receive or remit into Malta (and not re-transfer out of Malta) at least €13,950 (approx UK £9,800) plus €2,300 (approx UK £1,600) for every dependant, annually. 7 What about the UK/Malta Tax Treaty? Doesn’t that stop you paying too much tax? Whilst the treaty between the UK and Malta means that the same income or gain is not taxed twice, not all income or gains are taxed in both countries. The problem is, if you don’t know the rules, you can end up paying more tax than you need to do if you are paying it in the wrong country. Also, where income or gains are taxed in both countries, although you can offset the tax paid in, say, the UK against the tax due in Malta, if the tax payable in the UK is higher you will not get a refund of the difference in Malta. So ideally, if you can avoid paying the higher UK rate altogether, you can reduce your tax bill this way. However, just not paying the UK tax is not an option, so you need to take advice to make all of your income as tax efficient as possible. Are your investments tax efficient for you? The Blevins Franks Guide to Taxes in MALTA | September 2009 For UK residents, income derived from ISAs, PEPs and Premium Bond winnings are all completely free of tax. However, these are only tax efficient investments for UK purposes, and may be subject to tax in Malta if the income is remitted there. Also, did you know that although anyone may hold Premium Bonds, regardless of where they are resident (under the terms and conditions as at 1st February 2009), only UK residents may contribute to an ISA? Those who have left the UK may continue to hold such funds, but they can no longer put further funds into such investments once they have left the UK. Keeping cash offshore is dealt with in on the next page, but what about other investments, like shares, OEICs, unit trusts or investment bonds? These are not the most tax efficient investments to hold as a resident of Malta. There are legitimate structures available to residents of Malta, which if established correctly will enable both capital gains and income to be tax free even if they are remitted into Malta. It is best to get advice on this matter. 8 What about your pension income? The UK HMRC will not allow your UK pension to be paid free from UK tax unless you can prove it is remitted – and taxed – in Malta and may require evidence that you spend more than 6 months a year in Malta. It is however possible to arrange your UK pensions so that you can avoid this problem. If you are in a position to take advantage of this, you can arrange for your pension to be paid outside of Malta so that you do not suffer Maltese tax on the income. In addition your pension income will not be liable to UK tax. Again it is important to take advice on this matter – for example, unfortunately you will not be able to arrange this for any UK final salary schemes already in payment, if you have already purchased an annuity with your fund or if it’s a state pension. What about offshore bank interest? Countries within the EU exchange information about ownership of bank accounts automatically, under the terms of the EU Savings Tax Directive. The Blevins Franks Guide to Taxes in MALTA| September 2009 Under the Directive, there are currently two options available to those who have accounts in the many non-EU signatories to the Directive, e.g. Switzerland, the Isle of Man, Channel Islands etc. Under the first option, you can choose not to have details of the account(s) exchanged with Malta, in which case tax will be deducted at source (withholding tax), currently at 20% and increasing to 35% of the income from 1st July 2011. However, if you are resident in Malta, then you will only be taxable in Malta on offshore interest that is remitted to Malta. So, if you choose this option you will pay more tax in the country where the funds are held than you would in Malta. Alternatively, you can opt for exchange of information regarding the account with Malta, in which case you will receive the income gross. Note that from 1st July 2011 the Isle of Man will no longer offer the withholding tax option and will apply automatic exchange of information to all accounts belonging to EU residents. Failure to declare any taxable income in Malta will be seen as tax evasion and can be penalised. 9 What about your rental income? Many people retain UK property to ‘let’ out when they leave the UK. For some, this is their ‘pension’ fund and they may have one or more buy-to-let properties; others are unable to sell their UK main home when they leave the UK, and so decide to let it out to provide an income. This income remains taxable in the UK, and must be reported there each year. You could also be liable to UK capital gains tax when you sell a UK property unless you remain non UK resident for 5 complete and consecutive UK tax years. There are alternative methods of investment available to residents of Malta that are much more tax-efficient, and even where a property is not selling or being sold, it is worth taking advice to see if there is anything that can be done to mitigate taxes. Will you have to pay inheritance tax in Malta? There is no inheritance or gift tax in Malta, but Stamp Duty is chargeable on transfers of Maltese real estate at 5%, and on certain shares in Maltese companies at 2%. The Blevins Franks Guide to Taxes in MALTA | September 2009 If you remain UK domiciled, you will still be liable to UK inheritance tax on your worldwide assets until a new domicile of choice outside of the UK has been established. The Maltese domicile rules are similar to the UK, and it is tax advantageous to be a non Maltese domicile. However, you cannot argue to the UK tax authorities that you are a Maltese domicile, and then turn around to the Maltese tax authorities to state that you are a UK domicile. 10 Who is going to inherit your assets? Maltese succession law applies to real estate situated in Malta, regardless of the nationality or place of residence of the property owner. It also applies to the moveable assets of individuals who are domiciled in Malta, regardless of where the assets are situated. Under Maltese succession law, there is a reserved portion for the spouse and children, which varies depending on the number of children. If you have four or less children you must leave one third of your estate to them. If there are more than four children, you must leave them one half of your estate. The reserved portion for the spouse varies depending on whether there are children. Apart from the reserved portion, the surviving spouse also has the right of habitation in the main home. The residue of the estate outside the reserved portion may be freely disposed of. It may be given to those who have already inherited, or to persons who are not relatives of the deceased. You should therefore take advice before buying a property in Malta (as matters may be sorted out by simply reviewing how the property should be held), and certainly before moving to Malta. Even some of what people think of as the obvious answers, such as putting a property in the name of their children (for example, to avoid taxes on death) can have expensive unintentional results, in some cases even increasing the tax liability on death. If you were to put the property into the names of adult children, and you remain UK domiciled, it is unlikely to avoid UK inheritance tax if you are still using the property, and if your property is one of the children’s assets and they divorce or file for bankruptcy - what happens then? Using companies can be beneficial in some circumstances, but in other situations can solve some problems but can create problems in terms of other taxes such as income tax, capital gains tax and corporation tax. There are also the additional costs of setting up and the annual running costs of the company. . 11 The Blevins Franks Guide to Taxes in MALTA| September 2009 What about your Will? A Will made overseas is valid and effective in Malta but it must follow the form prescribed by the law of the country where it is made. The rules regarding the reserved portion are considered to be public policy, and therefore any dispositions contrary to such rules contained in a Will made outside Malta will not be given effect in Malta, if such a Will is challenged. If you set up a Maltese Will for Maltese assets, this may inadvertently revoke your UK Will, leaving your assets intestate, which can take a lot of time to sort out. Alternatively, the new Maltese Will may be at odds with your existing UK one, leading to disputes between your heirs, which may be expensive and costly to resolve, so you should take advice regarding Wills and ownership structure to ensure that you protect your assets. The Blevins Franks Guide to Taxes in MALTA | September 2009 12 Summary There are many issues facing UK nationals looking to buy property in and move to Malta, and a lot of these can be dealt with very easily, in many cases, provided you take advice. However, to make the most out of such a purchase or move, the adviser needs to be cognizant of both Maltese and UK tax law, as something that can save you tax in the UK can have the opposite effect in Malta and vice versa. There is no one solution for everyone, because each situation is different, and it is important to do your research, but there is no substitute for advice tailored to your specific circumstances. The Blevins Franks Guide to Taxes in MALTA| September 2009 13 Rates of Tax Income Tax Scale Rates for 2009 SINGLE RATES Chargeable Income € 0 - 8,500 8,501 - 14,500 14,501 - 19,500 19,501 & over Rate 0% 15% 25% 35% Deduct € 0.00 1,275.00 2,725.00 4,675.00 MARRIED RATES Chargeable Income € 0 - 11,900 11,901 - 21,200 21,201 - 28,700 28,701 & over Rate 0% 15% 25% 35% Deduct € 0.00 1,785.00 3,905.00 6,775.00 NOTE Residents of Malta under the Permanent Residents Scheme pay a flat rate of 15%. 14 The Blevins Franks Guide to Taxes in MALTA | September 2009 Tax Planning Investment Management Asset Protection Trustees Retirement Planning Pensions QROPS Foreign Exchange Domicile Determination UK Tax Residents Living Abroad Tax Residency Expatriates Returning To The UK Blevins Franks Financial Management Limited is authorised and regulated by the UK Financial Services Authority only for the conduct of investment and pension business. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts and companies. Blevins Franks Tax Advisory Service only gives taxation advice; all of the advisers are fully qualified tax advisers. This guide has been prepared based on the laws of the UK and Malta as at 1 August 2009. It is a general guide only and, in explaining complex matters in a simple way, cannot be relied upon as a substitute for professional advice. Blevins Franks cannot accept any responsibility for loss occasioned by any person’s action (or refraining from action) as a result of reading this guide. You must take detailed professional advice relevant to your particular circumstances before any action is taken. w w w . b l e v i n s f r a n k s . c o m contact us for more information and personal advice on your situation Blevins Franks, Barbican House, 26-34 Old Street, London EC1V 9QQ 0044 (0)20 7336 1116 or CLICK HERE to send us an email alternatively CLICK HERE to fill out our enquiry form