The international corporate tax framework is set to change with effect from 2024. Under an OECD Inclusive Framework, countries agreed to enact a two-pillar solution to address the challenges arising from the digitalization of the economy.
Pillar II introduces a global minimum Effective Tax Rate (ETR) via a system whereby multinational groups with consolidated revenue over €750m are subject to a minimum ETR of 15% on worldwide profits.
Following the announcement of political agreement on the matter, on 15 December 2022 the Council of the EU reached unanimous agreement to implement the EU Minimum Tax Directive (Pillar Two). Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise (MNE) groups and large-scale domestic groups in the Union entered into force on 23 December 2022.
The Directive requires Member States to transpose Pillar II rules into domestic law by 31 December 2023. The main rule of the Directive (the so called Income Inclusion Rule or IIR) will become effective on or after 31 December 2023, with the backstop rule (the so called Undertaxed Profits Rule or UTPR) coming into force on or after 31 December 2024. The Directive gives Member States the option to implement a qualified domestic top-up tax (QDMTT) that operates to increase the domestic tax liability of in-scope MNE groups within a jurisdiction to the minimum effective tax rate of 15% of profits.
By way of derogation, however, Member States in which no more than 12 ultimate parent entities of MNE groups within scope of this Directive are located may elect not to apply the IIR and the UTPR for 6 consecutive fiscal years beginning from 31 December 2023.
It is against this backdrop that the Minister of Finance announced, when delivering the 2024 Budget Speech on 30 October 2023, that Malta has decided to exercise the option granted to it by the Directive to delay the adoption of Pillar II rules up to 31 December 2029 on that basis and shall accordingly not be transposing any of the components of Pillar II rules – i.e. the IIR, the UPTR, and the QRMTT – into Maltese law in 2024.
The Minister of Finance also made a clear statement as to the fact that the current corporate tax system, being the full imputation system and relative tax refund rules, shall remain unchanged.
There was also mention, however, in the said Budget Speech, of the fact that the Government may look to tweak, in due course, any statutory grants or tax credits (so called Qualified Refundable Tax Credits or QRTCs) to ensure they remain compliant with EU and OECD rules.
This aligns with the fact that, in order to ensure Malta's corporate tax system remains in sync with developing international tax rules, the Minister had made an earlier announcement that work is underway to reassess and reformulate the mechanics of the tax system, so as to ensure that the tax system, whilst keeping up with the times, remains competitive and sustainable, with limited ripple effects on out-of-scope taxpayers.
In this context, the Minister of Finance indicated, in the 2024 Budget Speech, that there may be a transitional period of sorts in the coming period – keeping in mind that Malta may defer the implementation of Pillar II rules for a maximum period of 6 years i.e. up to 2029 – that may result in a slight increase in corporate taxation overall. This was coupled with a clear commitment by Government to ensure that Malta's corporate tax system remains competitive and, hence, attractive to investors.
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