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Income Tax Act (Cap. 123) Capital Gains (Amendment) Rules, 2005 (L.N. 5 Of 2005 )

INCOME TAX ACT (CAP. 123)
Capital Gains (Amendment) Rules, 2005
IN exercise of the powers conferred by articles 5 and 96 of the Income Tax Act, the Prime Minister and Minister of Finance has made the following rules>-

Title and commencement.

L.N. 102 of 1993

.

Amends rule 2 of the principal rules.

1. (1) The title of these rules is the Capital Gains (Amendment) Rules, 2005 and they shall be read and construed as one with the Capital Gains Rules, 1993, hereinafter in these rules referred to as “the principal rules”.
(2) These rules shall come into force as follows>-
(a) paragraphs (d) and (e) of rule 2, sub-rule (1) of rule 3, sub-rule (1) of rule 4 and rule 6 of these rules shall be deemed to have come into force on the 25th November, 2003 and shall apply to transfers happenning on or after that date<
(b) paragraph (g) of rule 2, to the extent that it refers to transfers of property that had been acquired causa mortis before the 25th November, 2003, shall be deemed to have come into force on the 25th November, 2003 and shall apply to transfers happening on or after that date< and
(c) except as provided in paragraphs (a) and (b) hereof, these rules apply to transfers happening on or after the date of the publication of these rules.
2. Rule 2 of the principal rules shall be amended as follows>
(a) the present provisions of the rule shall be renumbered as sub-rule (1)<
(b) for paragraph (a)(ii) of sub-rule (1), as renumbered, there shall be substituted the following>
“(ii) where the immovable property in question was acquired causa mortis, the value of that property established as provided in sub-rules (2), (3) and (4), and, where it was acquired by means of a donation, the value as declared in the deed of donation<”<
(c) for paragraph (a)(iv) of sub-rule (1), as renumbered, there shall be substituted the following>
“(iv) duty paid in terms of the Duty on Documents and Transfers Act on the transfer causa mortis of the immovable property in question, including duty paid on a deed of adjustment relating to that property made in terms of the Adjustments to Declared Value of Immovable Property Rules,
2005<”<
(d) for paragraph (a)(v) of sub-rule (1), as renumbered, there shall be substituted the following>
“(v) duty paid on the donation to the transferor of the immovable property in question in terms of the Duty on Documents and Transfers Act, the Death and Donation Duty Act or any law replaced by any of those Acts<”<
(e) for paragraph (b) of sub-rule (1), as renumbered, there shall be substituted the following>
“(b) the increase in inflation determined in accordance with rule 8<”<
(f) in paragraph (c) of sub-rule (1), as renumbered, the words
“made after 31st December, 1992” shall be deleted<
(g) immediately after sub-rule (1), as renumbered, there shall be added the following new sub-rules (2) to (4)>
“(2) Subject to sub-rule (4) –
(a) the value of immovable property acquired causa mortis on or after the 25th November, 2003 shall be deemed to be the value declared in a deed of transfer causa mortis made for the purpose of and in accordance with the provisions of the Duty on Documents and Transfers Act not later than six months after the date of the relative succession, without regard to any adjustment to or replacement of that declaration made after the said period of six months, and notice of which has been given to the
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Commissioner in accordance with that Act by not later than either fifteen working days after the date of the publication of the said deed or the expiration of the said period of six months, whichever is the later<
(b) where the notice referred to in paragraph (a) is given to the Commissioner later than fifteen working days after the date of the publication of the said deed and after the expiration of the said period of six months, the value of the property shall be deemed to be such value which, in the opinion of the Commissioner, represents the price which the property would have fetched had it been sold on the open market on the date of the transfer causa mortis<
(c) a value determined in accordance with paragraph (b) shall be subject to appeal> provided that no evidence shall be considered by the Board of Special Commissioners as sufficient to warrant any change to the value so determined if the notice referred to in the said paragraph is delivered to the Commissioner more than eighteen months after the date of the transfer causa mortis<
(d) notwithstanding the foregoing provisions of this sub- rule, where the value of property acquired causa mortis on or after the 25th November, 2003 is the subject of an assessment made under the Duty on Documents and Transfers Act, and that assessment becomes final and conclusive, or is confirmed or amended by a final decision of an appellate tribunal or court or is withdrawn following an agreement in writing with the Commissioner, the value of the property shall be deemed to be the value resulting from the said final and conclusive assessment, decision or agreement<
(e) where, in a final and conclusive assessment made under the Income Tax Management Act, the chargeable gain on a transfer of immovable property that had been acquired causa mortis on or after the 25th November, 2003 is higher than that declared by the taxpayer, and the excess is attributable to a value of the property exceeding the value declared by the taxpayer for the purpose of computing that gain by not more than twenty-five per cent of the taxpayer’s value, that excess shall not constitute an omission for the purposes of article 56(12) of the Act if the value declared by the taxpayer is supported by an architect’s valuation delivered to the Commissioner before that assessment became final and conclusive.
(3) Subject to sub-rule (4) -
(a) the value of immovable property acquired causa mortis before the 25th November, 2003 shall be deemed to be the value declared in a notice given to the Commissioner for the purpose of and in accordance with the provisions of the Duty on Documents and Transfers Act not later than the 30th June, 2005, taking into account any adjustment to the said value made in accordance with the Adjustments to Declared Value of Immovable Property Rules,
2005 and delivered to the Commissioner by not later than the 30th
June, 2005>
Provided that if the said property is transferred after the 25th November, 2004 and before the 30th June, 2005, the value of the property shall be deemed to be the value declared in a notice given as aforesaid not later than the date of that transfer, taking into account any adjustment made in accordance with the said Rules not later than the date of that transfer<
(b) where the notice referred to in paragraph (a) in respect of property acquired causa mortis before the 25th November, 2003 is not given to the Commissioner by 30th June, 2005 or, in the circumstances mentioned in the proviso to paragraph (a), by the date of the transfer, the value of that property shall be deemed to be such value which, in the opinion of the Commissioner, represents the price which the property would have fetched had it been sold on the open market on the date of the transfer causa mortis, and no evidence shall be considered by the Board of Special Commissioners as sufficient to warrant any change to the value so determined.
(4) When the total of the value of immovable property acquired causa mortis determined in accordance with sub-rule (2) or (3) and the deductions, disregarding the value so determined, allowable in accordance with the other provisions of these rules exceeds the value at which that property is transferred, the value determined in accordance with sub-rule (2) or (3) shall be reduced by an amount equivalent to that excess> provided that the value so reduced shall never be less than zero.”.
3. (1) Rule 4 of the principal rules shall be deleted.
(2) Immediately after rule 3 of the principal rules there shall be added the following new rule>
B 43

Substitutes rule 4 of the principal rules.

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“Value of securities aquired causa mortis or by a donation.

4. Subject to the other provisions of these rules, in computing the gains or profits on a transfer of securities acquired causa mortis or by means of a donation there shall be taken into consideration the value of those securities established by reference to the lower of –
(a) the value declared in respect of that acquisition for the purposes of the Duty on Documents and Transfers Act or of the Death and Donation Duty Act or any law replaced by any of those Acts, as the case may be, and
(b) the price which those securities would have fetched had they been sold on the open market on the date of that acquisition.”.

Substitutes rule 5 of the principal rules.

4. (1) Rule 5 of the principal rules shall be deleted.
(2) Immediately after rule 4, as substituted, of the principal rules there shall be added the following new rule>

“Transfer of company shares.

5. (1) Where a transfer of shares in a company is a transfer of a controlling interest in that company, the transfer shall be deemed, for the purpose of determining the chargeable gain, to have been made at the higher of the consideration and the market value of the shares.
(2) A transfer is a transfer of a controlling interest when any of the following criteria apply to the shares held by the transferor at any time during the period of eighteen months immediately preceding the transfer>
(a) their aggregate nominal value represents at least twenty-five percent of the nominal value of the issued share capital of the company<
(b) the aggregate voting rights attached to them represent at least twenty-five per cent of the voting rights in that company<
(c) the aggregate rights attached to them give the right to the holder to be appointed or to nominate or appoint or to withhold the nomination or appointment of a director of that company.
(3) When two or more transfers of shares in the same company (“the relevant transactions”) are made by the same
or by related persons within a period of eighteen months or less, then, for the purpose of determining the chargeable gains arising from the last of those transfers, the relevant transfers shall be deemed to be one transfer (“the global transfer”) made by the same person on the date of that last transfer, and if the global transfer satisfies any of the criteria listed in sub-rule (2), the following provisions shall apply>
(a) the last of the relevant transactions shall be deemed to be a transfer of a controlling interest<
(b) the market value of the shares transferred in the last transfer shall be deemed to be equal to the market value of the global transfer reduced by the total value that was or is to be taken into account for the purpose of determining the chargeable gain arising from each of the relevant transactions preceding the last of those transfers.
(4) For the purpose of sub-rule (3) -
(a) an individual is deemed to be related to another person if that other person is his spouse, his descendant in the direct line, his adoptive child, the spouse of any such descendant or adoptive child, his brother or sister, or a company of which the individual is, directly or indirectly, a shareholder<
(b) two bodies of persons are deemed to be related persons if they are companies within the same group of companies in terms of article 16 of the Act or are directly or indirectly controlled and beneficially owned as to more than fifty per cent by the same persons.
(5) The market value of shares in a company is a percentage of the market value of the company corresponding to the higher of –
(a) the percentage of the issued share capital represented by the nominal value of those shares, and
(b) the percentage of the total voting rights in the company represented by the total voting rights attached to those shares>
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B 46
Provided that -
(i) saving proviso (ii), where the percentage of the shareholding or voting rights of the transferor in the capital or voting rights of the company has been decreased as a result of a change in the issued share capital of that company made during the period of eighteen months preceding the transfer, the market value of the shares shall be determined by reference to the market value of the company and the nominal value of the shares, or the total voting rights in the company and the voting rights attached to the shares, as the case may be, as existing at the time immediately preceding that change<
(ii) the market value of shares that are listed on a stock exchange recognised under the Financial Markets Act shall be the last quoted price of those shares on that exchange before the date of the transfer.
(6) The market value of a company is the total of the net asset value of the company as resulting from its financial statements for the financial year preceding that in which the transfer is made>
Provided that -
(a) where the assets of the company include shares in another company, and such shares represent at least ten percent of the nominal value of the issued share capital of that other company, their book value shall be replaced by their market value determined in accordance with this rule 5, including this proviso<
(b) where the assets of the company include immovable property, the book value of that property shall be replaced by its market value, that is to say, the price that the property would fetch if sold on the open market on the date of the transfer<
(c) the net asset value shall be increased by an amount, representing the value of the goodwill, equivalent to two years’ average profits calculated by reference to the profits of the company for the five financial years immediately preceding the year in which the transfer is made.
(7) For the purpose of sub-rule (6) -
(a) where the transfer is made during the company’s first financial year, its net asset value shall be the nominal value of its issued share capital as adjusted in accordance with the provisos to the said sub-rule<
(b) where the company has not been in existence for a sufficient period to determine the value of the goodwill in the manner stated in proviso (c) to sub-rule (6), the average profits shall be calculated by reference to the total profits for the years preceding that during which the transfer is made>
Provided that, subject to paragraph (c), where the transfer is made during the company’s first or second financial year no value is to be attributed to the goodwill<
(c) where the company has acquired its business or part thereof from another person during the company’s first three financial years the value of the goodwill of the business so acquired shall be the higher of the consideration, if any, paid for the acquisition of the goodwill of that business and its value determined in accordance with the foregoing provisions by reference to the profits derived by that other person from the relevant business.
(8) Where a controlling interest includes shares in a company that directly or indirectly owns, at the time of the transfer of those shares, immovable property there shall be allowed a deduction for the increase in inflation calculated in accordance with rule 8 in respect of that immovable property or its relevant portion.
(9) Where a transfer of a controlling interest is a transfer to which article 5(3)(a) of the Act applies, the deduction allowable in terms of paragraph (8), where applicable, is to be deemed as satisfying the requirement for any adjustment to the value of the immovable property that may be due in terms of that article>
Provided that where the transfer is not a transfer of a controlling interest, the adjustment required by the said article
5(3)(a) shall consist of an increase for inflation made in
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accordance with rule 8 but taking indexyd to be the index for
1991.
(10) The transferor in any transfer of shares shall submit to the Commissioner a statement prepared by a certified public auditor stating whether the transfer is a transfer of a controlling interest or not and indicating the grounds on which this statement is based. Where the transfer is a transfer of a controlling interest or a transfer to which article 5(3)(a) of the Act applies, the auditor’s statement shall also include a computation of the market value of the shares as required by these rules, and shall be accompanied, where applicable, by an architect’s valuation of the market value of the immovable property taken into account in determining the value of the shares.
(11) The statement referred to in sub-rule (10) shall be delivered in triplicate to the Commissioner (Capital Transfer Duty Department) and the transferor shall, together with the delivery, pay to the Commissioner the provisional tax due on the transfer in accordance with article 43 of the Income Tax Management Act, and the Commissioner shall not consider that delivery or the notice of the transfer required in accordance with the Duty on Documents and Transfers Act as valid unless payment is made as aforesaid.
(12) The Commissioner shall stamp one of the copies of the certificate submitted in accordance with sub-rule (11) in acknowledgement of the receipt of same and return it to the person who submitted it.
(13) An architect’s valuation delivered to the Commissioner in accordance with this rule (“the taxpayer’s technical valuation”) constitutes proof of the market value of the property to which it refers unless a different value results from a valuation prepared by an architect appointed by the Commissioner (“the Commissioner’s technical valuation”)>
Provided that -
(a) where the taxpayer’s and the Commissioner’s technical valuations are produced in any proceedings in the Board of Special Commissioners, the Board shall, unless the parties otherwise agree, appoint a third architect to report on the value after examining the two valuations and inspecting the property, and the Board
shall decide the matter after taking into account the third architect’s report and any other consideration that it may consider appropriate<
(b) where, in a final and conclusive assessment, the chargeable gain on a transfer of shares is higher than that declared by the taxpayer, the excess shall not, to the extent that it is attributable to a value of immovable property as assessed exceeding the taxpayer’s technical valuation by not more than twenty-five percent, constitute an omission for the purposes of article 56(12) of the Act.”.
5. (1) For the marginal note to rule 6 of the principal rules there shall be substituted the marginal note “Notary to collect provisional tax and to give notices to the Commissioner”.
(2) In sub-rule (2) of rule 6 of the principal rules, for the words “in duplicate” there shall be substituted the words “in triplicate”.
(3) Immediately after sub-rule (3) of rule 6 of the principal rules there shall be added the following>
“(4) The notice referred to in paragraph (ii) of sub-article (9) of article 5 of the Act shall be made on the form prescribed in Schedule A to these rules and shall be presented in triplicate together with the notice referred to in sub-rule (2) of this rule. One of the copies shall be stamped by the Commissioner in acknowledgement of the receipt of the same notice and shall be returned to the Notary to be annexed to the relative deed.”.
6. Immediately after rule 6 of the principal rules there shall be added the following new rules 7 to 11>
B 49

Amends rule 6 of the principal rules.

Adds new rules 7 to 11 to the principal rules.

“Applicability of sub-

article 5(14)

of the Act.

7. The provisions of sub-article (14) of article 5 of the Act shall apply where the exchange of the shares does not produce any change in the individual direct or indirect beneficial owners of the companies involved or in the proportion in the value of each of the companies involved represented by the shares owned beneficially directly or indirectly by each such individual.
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Inflation.

8. (1) The increase for inflation of the value of immovable property is to be determined by using the index of inflation established in terms of article 13 of the Housing (Decontrol) Ordinance and applying the following formula>

cost of acquisition#improvements x indexyd – indexya

1 indexya
Where -
indexyd is the index for the year immediately preceding that in which the transfer is made<
indexya is the index for the year immediately preceding that in which the property in question had been acquired or completed, whichever is the later, or, when it relates to improvements, for the year immediately preceding that in which the cost for carrying out the improvements was incurred>
Provided that –
(a) where, in terms of the Act, the cost of acquisition of immovable property that is transferred by a person is to be determined by reference to an acquisition happening before the acquisition of that property by that person, indexya is the index for the year immediately preceding that in which the earlier acquisition took place<
(b) the deduction for inflation shall not exceed - TP – CA- D
where –
(i) TP = the transfer price of the property
(ii) CA = the cost of its acquisition, taking into account any reduction in the value of property that may be required in terms of rule 2(4)
(iii) D = the other deductions, excluding the deduction for inflation, allowable in terms of these rules.
(2) Where the increase in inflation is to be calculated in connection with a transfer of a controlling interest in a company in the circumstances mentioned in sub-rule 5(8), the formula referred to in sub-rule (1) hereof shall apply subject to the following provisions>
(a) indexyd is the index for the year immediately preceding that in which the transfer of the controlling interest is made<
(b) the increase is to be calculated by reference to such portion of the cost of the acquisition of the immovable property as corresponds to the portion of the immovable property represented by the shares transferred<
(c) if the property was acquired or completed by the company before the shares were acquired by the transferor, the increase in inflation computed in accordance with the foregoing provisions of this sub- rule shall be reduced by the amount corresponding to the increase in inflation from the date of the acquisition or completion of the property by the company to the date of the acquisition of the shares by the transferor< and when the shares were acquired in different years the reduction shall be calculated up to each year of acquisition. The cost of acquisition to be taken into account in each such calculation shall be such percentage of the cost of acquisition of the property as corresponds to the portion of the immovable property represented by the shares acquired in each year<
(d) the deduction for inflation computed in accordance with this sub-rule shall not exceed –
MV – CA – R
where -
MV = the market value, determined in accordance with rule 5, of the portion of the immovable property represented by the shares transferred
CA = an equivalent portion of the cost of acquisition or completion of that property
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Cost of acquisition of rights under a promise of sale or transfer or an emphyteu- tical grant.

R = the amount of the reduction, if any, computed in accordance with paragraph (c).
(3) Where the increase in inflation is to be calculated in connection with a transfer of an immovable property acquired causa mortis after the 24th November 1992 but before the 25th November 2003, and in respect of which an adjustment to the value thereof is made in accordance with the Adjustments to Declared Value of Immovable Property Rules, 2005, indexya shall be deemed to be the index for the year 2003.
9. (1) A transfer of any rights acquired under a promise of sale or transfer of immovable property or any rights over immovable property, including a promise of an emphyteutical grant, shall not be valid unless it is made by means of a written agreement signed by the transferor and the transferee and authenticated by a notary or an advocate and notice thereof is given to the Commissioner together with the relative payment in accordance with sub-rules (2) and (3).
(2) The notice referred to in sub-rule (1) shall be signed by the transferor and the transferee and authenticated by the notary or the advocate who authenticated the relative written agreement and shall be in the form set out in, and contain the information required by, Schedule B.
(3) The notice referred to in sub-rule (2) shall be delivered to the Commissioner (Capital Transfer Duty Department) in triplicate within twenty-one days of the relative written agreement and shall be accompanied by a payment of provisional tax equivalent to 7% of the consideration for the transfer.
(4) In computing the gains or profits on the transfer of any right to which this rule applies, the only deductions that shall be taken into account shall be in respect of>
(a) where the transferor had acquired that right from another person, the consideration, if any, which he had paid to that other person for that acquisition, to the extent that the consideration is supported by a receipt and results from an agreement that complies with this rule and in respect of which notice has been given and

Transfer of property by persons about to leave Malta.

payment of provisional tax has been made as provided for in this rule>
Provided that where the transferor had acquired that right under an agreement made before the date on which this rule came into force a deduction for the consideration paid for that acquisition shall be allowable if proof thereof is submitted to the satisfaction of the Commissioner<
(b) brokerage fees paid in respect of the said transfer, to the extent that they result from documentary evidence and supported by a receipt.
10. (1) If, in any particular case, the Commissioner has reason to believe that a person who intends to transfer immovable property may leave Malta before the tax that may become due on that transfer or any other tax that may be due by that person is paid, he may require the notary engaged to publish the deed of that transfer to give the notice referred to in sub-rule (3).
(2) When a notary is engaged to publish a deed of a transfer of immovable property and the transferor is a person who is either not resident in or not a citizen of Malta, that notary shall give the notice referred to in sub-rule (3) not less than two months before the date set for the publication of that deed.
(3) The notice required to be given by a notary in terms of sub-rule (1) or (2) shall state the details of the proposed transfer, including the details identifying the parties and their addresses, a description of the property, the date of the proposed transfer and the consideration at which the proposed transfer is to be made, and where an agreement for promise of sale or transfer has been concluded in writing, it should be accompanied by a certified copy of that agreement.
(4) A notary who is required to give a notice in accordance with sub-rule (1) or (2) may not publish the deed of the relative transfer before the expiration of two months from the date on which he gave the said notice to the Commissioner or before the date given in the said notice as the date of the proposed transfer unless he is so authorised in writing by the Commissioner>
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Rules to be without prejudice to certain provisions of article 43 of the Income Tax Management Act.

Provided that in any case the notary may not publish the deed of the relative transfer>
(a) unless the transfer is made for a consideration not exceeding the consideration notified to the Commissioner as aforesaid< and
(b) unless he complies with any conditions that may have been imposed in the authorisation in writing given by the Commissioner before the publication of that deed< and
(c) if the Commissioner refuses to give the said authorisation and notifies the notary of that refusal before the publication of the deed.
(5) The Commissioner may refuse to give the authorisation mentioned in sub-rule (4) if, in the circumstances mentioned in article 46 of the Income Tax Management Act and subject to the procedures provided for in that article, the transferor has not made such payment, and, or made such return, and, or given such security as the Commissioner may have requested in accordance with that article>
Provided that the Commissioner may give the said authorisation on condition that on the deed of transfer the notary collects, by means of a deduction from the transfer price, an amount equivalent to the payment or security that the Commissioner requests in accordance with the said article and remits that deduction to the Commissioner within fifteen days of that transfer.
11. These rules shall be without prejudice to paragraph (a) of sub-article (1) and paragraph (a) of sub-article (4) of article 43 of the Income Tax Management Act.” .

SCHEDULE A

(Rule 6(4))

Name of transferor company

Delivered by (officiating notary)

I (a director and/or legal representative of transferor company),

of the above-named company, hereby give notice, in accordance with article 5(9) of the Income Tax Act, of the transfer of the immovable property referred to below and assume full responsibilty as to the correctness of the contents of this notice.

1. Details referring to the immovable property

, on behalf

2. Details relating to transferor company appearing on this deed

3. Details referring to transferee appearing on this deed

4. Details referring to all previous transferors and transferees since the immovable property entered the group

Signature Dated this day of of the year

(Director and/or legal representative)

5. Certificate by auditor:

I (certified public accountant),

, do hereby certify that the information

contained in this notice is true and correct and agrees with the relative financial statements of the above-named company.

Signature Dated this day of of the year

(Certified Public Accountant)

B 57

(Rule 9(2))

Schedule B

This notice is to be filled in, duly signed by all parties and delivered in triplicate to the Commissioner (Capital Transfer Duty

Department) within 21 days of the relative transfer and shall be accompanied by a provisional payment equivalent to 7% of the consideration relating to the transfer.

1. Details referring to the property in respect of which the right is being transferred

2. Details relating to transferor

3. Details relating to transferee

4. Provisional tax payment

Notification will be invalid if cheque is dishonoured.

5. Signatures of parties

Signature of transferor Signature of transferee

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6. Witness to signatures

OFFICE USE

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