A fringe benefit refers to compensation for services rendered by an employee which is not in the form of cash. The Income Tax Act provides that any gains or profits arising from any employment, including the value of any benefit provided by reason of such employment, should be subject to income tax unless a specific exemption is applicable.
This would typically include the private use of a motor vehicle, or immovable property, by an employee which is owned or leased by the employer, free or discounted meals, airline or sea transport tickets, as well as reimbursements of expenses incurred for private use. The taxable value of such benefits are determined through the fringe benefit rules, together with guidelines issued by the Inland Revenue Department.
A new legal notice was recently published, whereby a number of updates and clarifications were effected to the fringe benefit rules. A principal change made was simply an adaptation in response to today’s cross-border work relationships and geographically dispersed workforce.
In terms of the updated legal notice, wherever a benefit is deemed to arise by reason of an employment or office, the income represented by the value of that benefit shall be deemed to arise in the jurisdiction where the work is wholly or principally performed. If the benefit is deemed to arise by reason of a directorship in a company, it shall be deemed to arise in the jurisdiction where that company is managed and controlled.
The fringe benefit rules categorise such benefits as those relating to motor vehicles, benefits relating to the use of property, as well as a general category bringing together any other benefits.
As far as motor vehicles are concerned, the taxable benefit of the private use value of a car is calculated according to the related vehicle use value, maintenance value and fuel value. Such value is then multiplied by a reference rate, essentially a private use percentage dependent on the car value. The higher the value of the car, the higher the private use percentage, and therefore, the greater the taxable fringe benefit.
The percentage of private use depends upon the value of the car. With the revised rules, the percentage of private use has now been revised down from 20 to zero per cent when the value of the vehicle is less than €16,310, and is used for point to point services as approved by the Commissioner. Thus in such situations, no taxable benefit shall be deemed to arise.
The list of vehicles, which when used for private purposes do not give rise to a taxable fringe benefit, now also includes vans, defined as any ‘mechanically propelled road panel vehicle or utility, or any other commercial vehicle, whose construction is primarily suited for the conveyance of goods with no seating capacity for passengers except for seating adjacent to the driver’. In this regard, the old rule providing that the annual value of a benefit consisting in the private use of a van is of €465, has been removed.
When it comes to the taxability of fringe benefits vis-à-vis immovable property, updates were made as to how to determine the cost of immovable property, for the purpose of calculating the benefit. When property is held by a person under a title of perpetual or temporary emphyteusis, the price for the acquisition thereof shall now be deemed to be the price or any premium paid or payable, in accordance with the deed of emphyteusis, without the requirement to increase the amount by five times the annual ground rent payable, as provided in the previous version of the rules.
A fringe benefit refers to compensation for services rendered by an employee
The updated rules also state that when the property is held under a title of emphyteusis, the value of the benefit relating to the private use of such property shall be the higher of five per cent of the market value and the total of five per cent of the cost of the property plus the amount equal to the relative annual ground rent.
With reference to beneficial loan arrangements, the benchmark rate of interest on a loan, as set out in the rules, has now been brought down to 6.5 per cent.
When it comes to the value of free or discounted transfer of property, a provision has been added to the effect that when the benefit consists of the transfer of a motor vehicle, and the beneficiary had, before the transfer, made private use of that motor vehicle, the value determined shall be reduced by the total value of the fringe benefit that was deemed to have been provided to that beneficiary as a result of the private use of that motor vehicle.
With the new rules, the value of share option scheme benefits now also includes share award schemes. The benefit shall be deemed to be provided on each date that shares are issued or transferred to the beneficiary in terms of the share award scheme in question.
The value of the share option scheme benefit shall be the excess, if any, of the price which the shares in question would fetch if sold in the open market on the date when the benefit is provided, over the price paid or payable by the beneficiary for those shares. The income represented by the value of the benefit shall be subject to tax at the rate of 15 per cent.
As a result of the updated rules, the list of tax-exempt fringe benefits was expanded to include relocation costs and costs of journeys between shifts when travelling between Malta and Gozo for business purposes. Meanwhile, the costs of travelling between Malta and Gozo now also include travel by air.
Moreover, the costs incurred by and charged in the name of an employee, as evidenced by receipts produced to the employer, or by his employer for the provision of fixed or mobile telephony services, now includes the cost of a mobile phone or a facsimile machine used by the employee for the purpose of the business of the employer.
Health-related costs have also been included as an exempt fringe benefit. Health-related costs mainly refer to the cost of a medical examination, test or screening, which an employee is required to undergo to take a new employment, or to take up a new post with the same employer, or to gain entry to a superannuation fund.
They also include the cost of medical care, medicine and other medical treatment provided as a prevention against injury or illness related to an employment, as part of a programme available generally to employees exposed to the same work-related health risks.
Health-related costs also incorporate the cost of individual or group counselling relating to safe work practices, health, fitness, stress management or drug or alcohol abuse, given as part of a programme available generally to employees exposed to the same work-related health risks.
Paul Giglio is a taxation and assurance partner at Mazars Malta, a member firm of Mazars Group.