Government of Malta - Inland Revenue Department

22/8/2008

Collective Investment Schemes

CIS guide

5. Withholding Tax Suffered by Recipients of Investment Income from CISs

5.1 - Withholding Tax on Capital Gains Arising on the Disposal of Units or Shares in Non-Prescribed Funds

Except as indicated below, when securities in non-prescribed funds of a Malta based scheme are redeemed, liquidated or cancelled, withholding tax at 15% becomes due on any capital gains arising on that disposal. Tax is also due on the redemption, liquidation or cancellation of securities in overseas based schemes, but, in such cases the 15% withholding rate on investment income applies only if the recipient utilises the services of an authorised financial intermediary as explained in Section 6.

The 15% withholding tax is not applicable on capital gains:

arising on the disposal of units or shares in a non-prescribed fund of an overseas based scheme where such disposal is not by way of a redemption, liquidation or cancellation⁶. Thus, when securities in a non-prescribed fund are transferred to third parties (and not redeemed, liquidated or cancelled) the transferor must declare the gains in his tax return and pay tax at the normal rates. The capital gains on the eventual redemption will, however, be calculated without reference to that intermediate transfer, and purchasers should take this rule into account in deciding on the price they are prepared to pay for the securities;
derived by non-residents⁷or by other collective investment schemes⁸;
arising on the disposal of units or shares in a prescribed fund⁹.

Switching units from one fund to another within the same collective investment scheme does not give rise to capital gains. Therefore, in such cases, the investment income provisions cannot be applied.

In determining the taxable capital gains that arise on the disposal of units or shares in non-prescribed funds that are listed on the Malta Stock Exchange, the cost of acquisition is calculated at the average cost of all the units of the same class held by the investor. Thus, whenever a disposal is made, one must find the cost of the units of the same class held at that date and then calculate the average by dividing that total cost by the total number of those units.

This average is deemed to be the cost of acquisition of each unit. If the investor does not sell all the units, the unsold units will be treated as having been acquired at that average for the purpose of calculating the capital gains on a subsequent disposal.

A further rule that applies in determining the capital gains in such cases is that gains that are deemed to accrue before the 1st March 2001 are not subject to tax. For this purpose the cost of acquisition of units held on 1st March 2001 is equal to the price last quoted on the Malta Stock Exchange before that date. Where, however, the price quoted on the Malta Stock Exchange on the date of purchase of such units is higher than their price quoted on 1st March 2001, the cost of acquisition of such units shall be equal to this higher price.

An illustration of the calculation of capital gains is given in Table 2.

When the securities are held in a Malta based scheme, the obligation to withhold this tax will be on the scheme itself. It will therefore need to calculate the taxable gains and for this purpose it must be in possession of all the relevant data, including a track of each investor's acquisitions and redemptions. It will, moreover, have the obligations imposed by the Act on payors to remit the tax to the Commissioner of Inland Revenue not later than 14 days from the end of the month during which it is withheld.

If the collective investment scheme is an overseas based scheme, the obligation to withhold tax arises only if the recipient utilises the services of an authorised financial intermediary. In such a case, the obligation to withhold tax is on the financial intermediary who will need to obtain the necessary information from the scheme or the recipient, as the case may. The authorised financial intermediary will have the obligation to remit the tax to the Commissioner and to furnish certain details as explained in Section 6.

Withholding Tax on Dividends Distributed by Non-Prescribed Funds

5.2 - Withholding Tax on Dividends Distributed by Non-Prescribed Funds

Dividends paid by a Malta based scheme that is a distributor scheme (whether in relation to units in a prescribed or non-prescribed fund) are governed by the rules laid down in article 67A of the Income Tax Act. Profits that do not suffer tax in the hands of the scheme are allocated to an 'untaxed account'¹⁰ of such scheme. In the particular case of investment income arising to the scheme in relation to a non-prescribed fund, the scheme would not have suffered any withholding tax on such income and thus, profits arising therefrom are allocated to its untaxed account. Profits distributed to individuals resident in Malta out of this account are subject to withholding tax at 15% under the normal provisions of the Income Tax Act¹¹.

Dividends paid by an overseas based scheme that is a distributor scheme, qualify as investment income. However, in order that the 15% final tax may be withheld, the recipient of such dividends needs to:

be a recipient that is not a collective investment scheme; and
utilise the services of an authorised financial intermediary. The authorised financial intermediary will have the obligation to withhold and remit to the Commissioner the amounts withheld. He is also to submit certain details together with such remittance. The rules in relation to such financial intermediaries are explained in Section6.

5.3 - Tax Consequences on Investors of a Reclassification of a Fund

If any units or shares in a prescribed fund are disposed of after that fund is re-classified as a non-prescribed fund they will be subject to tax on capital gains calculated as if the fund had always been classified as a non-prescribed fund. No relief is available for gains accruing before the reclassification. The scheme will be required to calculate the gains, withhold the tax and remit the amount withheld to the Commissioner.

A reclassification of a fund from a non-prescribed to a prescribed status triggers a liability to tax on capital gains on the investors at the time of disposal. This liability is arrived at by calculating the amount of tax that would be due if the investors disposed of their units or shares in that fund on the date of the reclassification. The collective investment scheme in question must make this calculation as it will be bound, as a payor, to withhold the appropriate amount of tax on any eventual disposal of the said units or shares.

The manner in which capital gains are calculated on the disposal of units or shares in non-prescribed funds is described in Section 5.1 above and illustrated in Table 2. But a disposal in the circumstances referred to above is subject to a further rule. The tax liability will not arise on the date of the reclassification but when the shares or units in question are actually disposed. For this purpose, any disposal by that investor of units or shares in that fund after the date of the reclassification is to be deemed as a disposal of the units or shares in a non-prescribed fund. This assumption continues until all the 'old' units or shares have been disposed of. This is illustrated by the example in Table 3.

⁶The provisions of article 41(a)(v)(1) of the Income Tax Act specify that only capital gains arising on the disposal of shares or units in a collective investment scheme upon a redemption, liquidation or cancellation are considered as investment income.

⁷A non-resident person is excluded from the definition of 'recipient' which is found in article 41(c) of the Income Tax Act. Furthermore, in accordance with the provisions of article 12(1)(c)(ii) of the Income Tax Act, non-resident persons are exempt from tax on capital gains resulting from the disposal of units in a collective investment scheme.

⁸In accordance with the provisions of article 41A(a)(ii) of the Income Tax Act.

⁹Refer to sub-paragraph (i) of the proviso to article 41(a)(v)(1) of the Income Tax Act. However, such gains are chargeable to tax at the normal rates of tax if the shares or units are not listed on the Malta Stock Exchange (refer to article 5(6)(c) of Income Tax Act).

¹⁰Refer to the definition of 'untaxed account' in article 2 of the Income Tax Act.

¹¹Refer to article 62 of the Income Tax Act.

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