On 24 December 2019, Malta has published Legal Notice 348 of 2019 implementing EU Anti-Tax Avoidance Directive (2017/952) (ATAD 2) into Malta domestic law. ATAD 2 amends the EU Directive 2016/1164 which applies to mismatches between EU member states, to hybrid mismatches with non-EU countries, and brings additional types of hybrid mismatches within the scope of the measures. The main measures of the Legal Notice are as follows:

Hybrid Mismatches

ATAD 2 provides that when a hybrid mismatch results in a double deduction:

• the deduction shall be denied if Malta is the investor jurisdiction; and
• the deduction shall be denied if Malta is the payer jurisdiction and the deduction is not denied in the investor jurisdiction:

Provided that, any such deduction shall be eligible to be set off against dual inclusion income whether arising in a current or subsequent tax period.

To extent that hybrids mismatch results in a deduction without inclusion:

• the deduction shall be denied if Malta is the payer jurisdiction; and
• the amount of the payment that would otherwise give rise to a mismatch outcome shall be  included  in  income  if  Malta  is  the  payee jurisdiction and the deduction is not denied in the payer jurisdiction.

Reverse Hybrid Mismatches

ATAD 2 provides that where one or more associated non-resident entities holding in aggregate a direct or indirect interest in 50% or more of the voting rights, capital interests or rights to a share of profit in hybrid entity that is incorporated or established in Malta are located in a jurisdiction or jurisdictions that regard the hybrid entity as a taxable person, the hybrid entity shall be regarded as a resident of Malta and taxed on its income to the extent that that income is not otherwise  taxed under any other provision of the Income Tax Acts or in any other jurisdiction.

This shall not apply to a collective investment vehicle. For the purposes of this regulation, “collective investment vehicle” means an investment fund or vehicle that is widely held, holds a diversified portfolio of securities and is subject to investor-protection regulation in the country in which it is established

Tax residency mismatches

Where a deduction for payment, expenses or losses of a taxpayer who is resident for tax purposes in  Malta  and  in  another  jurisdiction  is deductible from the tax base in Malta and in that other jurisdiction, the deduction shall be denied to the extent that  the  other  jurisdiction  allows  the  duplicate deduction to be set off against income that is not dual-inclusion income. If the other jurisdiction is a Member State, the deduction shall be denied only if the taxpayer is not deemed to be resident in Malta according to the double taxation treaty between Malta and the other Member State concerned.

The provisions of regulations are effective from 1 January 2020, except for the reverse hybrid rules which will apply only as of tax year 2022.