Tax measures being evaluated by European Commission

EU member states are evaluating a batch of potentially "harmful" tax schemes and fiscal measures applying in the 10 acceding countries with the aim of setting up a definitive "black list" of those measures which will have to be removed or adapted by May 1, according to the latest issue of l-Aggornat.

The Malta-EU Information Centre weekly publication said the European Commission had identified a number of tax measures that appear to contain harmful features within the meaning of the existing EU code of conduct for business taxation.

This code was adopted by a Council of Ministers resolution on December 1, 1997.

In the accession negotiations, the acceding countries, including Malta, pledged to comply with the principles of this code. In total, 52 tax measures applying in the 10 acceding countries are listed as "potentially harmful": one in the Czech Republic, five in Hungary, two in Poland, five in Slovakia, three in Slovenia, four in Latvia, four in Lithuania, 16 in Cyprus and 12 in Malta.

L-Aggornat, carrying last Saturday's date, said that the "black list" would be part of the commission's forthcoming final monitoring report on the candidate countries' readiness to join the EU next spring. The report is due to be published on November 5.

According to a report published by Agence Europe, of the 12 potentially "harmful" tax measures in Malta, the Commission is proposing to assess seven as harmful. They are:-

Measure ML1: Offshore trading and non-trading companies; Measure ML2: Offshore insurance companies/Insurance companies;

Measure ML3: Offshore banking companies/Banking Companies.

Malta has indicated that it agrees with the Commission's assessment on the above three measures. Moreover, these were already repealed in 1996 with a transitional period until September 23, 2004;

Measure ML4: International Trading Companies. The Commission considers this measure to be harmful because the benefit, an effective tax rate of 4.2 per cent instead of the general tax rate of 35 per cent is only available for non-residents and the measure creates a new type of offshore regime;

Measure ML5: Dividends from (other) Maltese companies with foreign income. The Commission considers this measure to be harmful since it gives the opportunity to non-residents to use it as a favourable holding regime. The measure provides for a tax exemption on income received from a subsidiary located in a country with a significantly lower level of taxation than is applicable in Malta without the presence of appropriate anti-abuse measures.

Measure ML7: Investment Service Companies. This measure provides for additional deductions that are not available to other resident companies. The Commission said that this measure may significantly affect the location of business activity, notably in the highly competitive and mobile area of financial services. The Commission therefore considers the measure to be harmful.

Measure ML11: Non-resident companies. The Commission said the measure may significantly affect the location of mobile activities. The measure provides for the taxation of foreign income to be postponed even indefinitely.

Although Malta has indicated that it does not fully agree with the assessment made by the Commission for tax measures ML4, ML5, ML7 and ML11, it is considering changing elements of all these measures.