Professor Edward Scicluna, the Minister responsible for Finance, delivered the 2019 Budget Speech yesterday, the 22^nd October 2018, against a backdrop of positive economic growth.

Whilst the surplus for 2018 is expected to amount to around €16.6m (1.1% of GDP), for 2019, this is expected to grow to around €33m. GDP for 2018 is expected to be €12bn representing an increase of 7.7% in nominal terms (5.3% in real terms) and Government debt as at the end of 2018 is expected to amount to around 46.8% of GDP (i.e. €5.6bn) with the expectation for it to reduce to 43.8% of GDP by 2019. Meanwhile, the unemployment rate for 2019 is expected to be 4.1%, remaining below the EU average rate.

This brief update looks at some of the more salient fiscal measures announced in the 2019 Budget Speech.

Direct Tax

Tax refund to employees

Individuals whose income is less than €60,000 per annum will benefit from a tax refund. Individuals whose income falls within the tax free bracket will also benefit from same. The refund will vary between €40 and €68 depending on the level of income and tax status of the employee.

Reduction of tax for part-timers

Persons receiving earned income who pay tax according to the single computation, whose employment income is derived from part-time employment which exceeds the ceiling of €9,100 but does not exceed the minimum wage, will not be subject to tax.

Exemption on pension income

Following the introduction of the exemption in respect of pension income as from 1 January 2017, the maximum amount of exempt pension income will be increased from €13,200 to €13,434.

Fiscal incentives for contributions to private pensions

Increase in the tax exemption/tax credit for personal pension plans and voluntary occupational pension plans. Presently the law provides for a tax exemption on income from certain financial investments. The investment amount generating the exempt revenue is subject to applying a capping. The applicable capping has been increased to €2,000 per annum. Moreover, employees and employers paying contributions to a qualifying scheme will now benefit from a tax credit of 25%, which marks an increase of 10% over the existing rate.

Deduction for private school fees

Parents of children who attend private schools will benefit from an increase of €300 per child in the current tax deduction, Article 14B of the Income Tax Act provides for a tax deduction in respect of parents sending their children to private independent schools.

Exemption for voluntary organisations

Voluntary organisations with annual income not exceeding €10,000 will be exempt from income tax, subject to their registration with the Commissioner for Voluntary Organisations.

Introduction of a patent box regime

A new Patent Box Regime compliant with the EU Code of Conduct (Business Taxation) and OECD proposals on the Modified Nexus Approach is being developed by the Government.

Indirect Tax Measures

Reduced rate of VAT on electronic publications

The current reduced VAT rate of 5% on printed matter and audio books, books and similar printed matter supplied on CD, DVD, SD-card and USB as provided for in the Eighth Schedule to the Maltese VAT Act will be extended to cover also books, newspapers and other publications provided electronically.

VAT refund schemes

• Extension of the VAT refund scheme on the purchase of a musical instrument even when the instrument is purchased from outside Malta.
• The grant of VAT on wedding expenses will be increased by €250 to a maximum of €2,000.
• A VAT rebate will be given for the purchase and installation of domestic reverse osmosis or similar water purifying processes, capped at €70.
• The extension of the VAT rebate scheme on the purchase of bicycles and pedelec bicycles for another year.
• The extension of the VAT rebate of up to €400 on motorbikes, scooters, bicycles with an electric assist motor for another year

VAT refund on car registration tax

During 2019 VAT will be refunded to those who registered their vehicle in 2008.

Transfer Duty

Extensions to existent schemes

• Transfer of business to descendants

In 2017, a reduced rate of 1.5% on the certain transfers to qualifying relatives was introduced. This scheme has been extended for another year.

• First time buyers

The tax scheme for first-time buyers, originally introduced in 2014, shall be extended for another year.

• Second time buyers

In last year’s budget speech the Minister mentioned that individuals, termed as “Second Time Buyers”, who sell their residential home, being their sole owned immovable property, and acquire another home (“second home”) within 12 months from the date of transfer of the replaced property shall receive a refund of the duty paid on the first €86,000 of the value of the replacement property. This scheme was available up to 31 December 2018 but has now been extended for another year.

• Reduced rate of Duty on Documents on acquisitions of immovable properties in UCAs

The reduction of duty on documents from 5% to 2.5% applicable on the acquisition of immovable property situated in Urban Conservation Areas will be extended for another year.

• Reduced rate of Duty on Documents on acquisitions of immovable properties in Gozo

The reduction of duty on documents from 5% to 2% applicable on the acquisition of immovable property in Gozo will also be extended for another year.

Furthermore, Government is proposing a reduction in tax upon an eventual sale of property for landlords who lease out property at an affordable rent for 7 years (details to follow).

Social Measures

Cost of living increase

The cost of living increase for 2019 amounts to €2.33 per week. Such increase will be granted to all employees, to pensioners and to those receiving social benefits. Students will also be granted such cost of living increase on a pro-rata basis.

Measures relating to employment

Employees will benefit from an additional day of leave bringing the total vacation leave entitlement to 26 days.

Pensions

Social security pensions will be increased by €2.17 per week. Thus, together with the cost of living increase, the total increase for pensioners will amount to €4.50 per week.

The possibility to continue working beyond retirement age up to 65 years in order to increase pension entitlement (where applicable), is also being gradually extended to employees working in the public sector.

Family Measures

An increase in Children’s Allowance to a maximum of €96 per annum per child to families with annual gross income of less than €20,000.

Measures relating to self-employment

Self-employed persons who for certain reasons had to stop working will have a right to receive unemployment benefits in line with the social security contributions paid during their period of self-employment.

International Tax

The introduction / implementation of a number of international anti-tax avoidance measures was announced including an interest limitation rule, exit taxation, a general anti-abuse rule (GAAR) and controlled foreign company (CFC) measures. Malta has also signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (MLI).

A number of other measures are in the process of being transposed for implementation by the applicable deadlines including ATAD II, EU Mandatory Disclosure and the EU Dispute Resolution Mechanism. These measures are being introduced so as to update the Maltese provisions and bring them in line with international standards and the common EU rules being introduced.

Author: Dr. Sarah Rausi, Senior Associate, Tax Department