The government has removed a rather draconian clause in the law which said that anyone found guilty of a tax offence for the second time would have to serve a mandatory jail term of a minimum three days.

This is one of a number of clauses originally in the Budget that has been tweaked by the government to iron out anomalies and make them more workable and equitable.

Reacting to the jail term provision removal, EY tax expert Robert Attard said: “This was quite harsh, especially when you take into account that not filing a return counts as a tax offence! And because there was no judicial discretion, the court would have had no option but to send the offender to jail. This has happened in the past and there are a number of constitutional cases already challenging this. However, the law now also allows the judiciary to impose a fine for second offenders”.

The government has also changed the way in which shareholders’ dividends are taxed following the revision of tax bands on earned income.

Originally, the reductions were not going to apply to dividends, which would have created a two-tier system that may have discouraged the payout of dividends.

In the past, shareholders would declare the gross dividends but would receive the net amount, with the Inland Revenue Department then granting a rebate based on the applicable tax rate. The original solution was for the department to then make an adjustment for the different tax rates so that the rebate would remain based on a 35 per cent rate, with shareholders foregoing more and more rebate with each successive reduction in the rate on earned income from 35 per cent to 25 per cent.

Dr Attard noted that the government has solved this issue by simply restricting the rebate to the portion of dividends which, when combined with the shareholders’ other income chargeable to tax in Malta, does not exceed the threshold corresponding to the 25 per cent tax band as determined by the rates applied thereon.

Another clause in the Budget was for capital gains tax to also apply to debt claims – the passing on of loans. Dr Attard and other practitioners made several representations to the ministry on this point, explaining that it would have a very negative impact on international business. They were successful and this clause was not in the Act which was finally published in the Government Gazette.

Another important change was made to the tax-free threshold for non-resident EU nationals who work in Malta. The eligibility – based on the percentage earned in Malta – was going to be changed in a way which would have brought the tax-free bracket down from €8,500 to around €700, a situation which would certainly have been legally challenged as being discriminatory.

The clause now makes it clear that as long as 90 per cent of the income is earned in Malta, the non-resident would be eligible for the same tax rates as residents, a formula in use in many other member states.

Dr Attard is already looking ahead and noted that the next Budget would need to make a few other changes to ensure that there was no discrimination on tax laws as a result of the Civil Unions Act, such as the removal of the joint reporting option for couples.