Summarised guide – tax on transfer of shares in Malta

Tax on transfer of shares – Capital Gains in Malta

Capital gains tax plays a pivotal role in Malta’s tax system, particularly concerning the transfer of shares. For individuals and businesses involved in the transfer of securities, understanding the tax implications is essential. This article provides a detailed overview of how Malta taxes capital gains arising from share transfers and highlights key considerations for compliance.

Definition of Capital Gains

Capital gains refer to the profit earned from the disposal or transfer of a capital asset, including shares and other securities. Malta’s Income Tax Act governs the taxation of these gains, with specific provisions addressing the transfer of shares.

Securities Subject to Capital Gains Tax

Capital gains tax applies to the transfer of various securities, including:

• Shares in companies
• Bonds
• Debentures
• Units in collective investment schemes

Among these, share transfers in companies are a critical area, particularly when the company holds immovable property in Malta.

Tax on Transfer of Shares

Transfers of Shares in Companies Without Immovable Property

When a company does not own immovable property in Malta, the tax treatment differs based on the residency of the seller:

• Non-Residents: Non-residents are generally exempt from capital gains tax on the transfer of shares in companies without immovable property in Malta.
• Residents: Maltese residents are taxed on the capital gains derived from the share transfer. The gain is calculated as the difference between the sale price and the acquisition cost, adjusted for allowable expenses.

Transfers of Shares in Companies Holding Immovable Property

If the company being transferred owns immovable property in Malta, the transaction is treated differently:

• Deemed Immovable Property Transfer: The transfer of shares in such companies is treated as equivalent to a transfer of the immovable property itself.
• Tax Calculation: Capital gains are determined based on the increase in the value of the shares, taking into account the market value of the underlying immovable property.
• Exemptions: Exemptions may apply under double taxation agreements or specific provisions in Maltese tax law.

Example: Share Transfer in a Company Holding Immovable Property

• Market value of the property: €500,000
• Original purchase price of the shares: €200,000
• Sale price of the shares: €400,000
• Incidental costs (e.g., legal fees): €10,000

Taxable Gain:

• Gain: €400,000 – €200,000 = €200,000
• Deduct incidental costs: €200,000 – €10,000 = €190,000
• Tax (assuming an 8% rate): €190,000 x 8% = €15,200

The applicable tax rate depends on whether the transaction is treated as a property transfer or qualifies for exemptions.

Participation Exemption

The participation exemption offers significant relief for companies. Capital gains from share transfers are exempt if the following conditions are met:

• The shareholder holds at least 5% of equity shares or voting rights.
• The shareholder satisfies other conditions, such as a minimum holding period.

Calculating Capital Gains on Share Transfers

Capital gains on share transfers are calculated as the difference between the selling price and the acquisition cost, adjusted for expenses related to the transaction.

Example:

• Acquisition cost: €20,000
• Selling price: €30,000
• Incidental costs: €1,000

Taxable Gain = (€30,000 – €20,000) – €1,000 = €9,000

Exemptions from Capital Gains Tax on Share Transfers

Malta provides several exemptions for capital gains arising from share transfers:

1. Transfers of Listed Shares
   Shares listed on a recognized stock exchange are typically exempt from capital gains tax, encouraging investment in publicly traded companies.
2. Transfers Between Related Parties
   Share transfers between related parties may qualify for exemptions, depending on the relationship and the purpose of the transaction.
3. Non-Resident Transfers
   Non-residents transferring shares in Maltese companies are exempt from capital gains tax, provided the underlying company does not hold immovable property in Malta.
4. Participation Exemption
   As previously mentioned, this exemption applies to qualifying companies meeting specific criteria.

Reporting and Compliance for Share Transfers

Taxpayers involved in share transfers must adhere to strict reporting and compliance requirements, including:

• Accurate Record-Keeping: Maintain detailed records of all transactions, including acquisition costs, sale prices, and incidental expenses.
• Tax Return Filing: Declare the transaction and any resulting capital gains in the relevant section of the Maltese income tax return.

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_{The sole practitioner at Equitas Advisory is a member of the Malta Institute of Accountants and the Association of Chartered Certified Accountants and is authorised to practice the profession of Accountancy in Malta in line with the Accountancy Profession Act. Cap.281. by the Malta Accountancy Board – Warrant number 121176.}