Introduction
Securitisation was introduced in Malta’s legal framework in 2006 through the enactment of the Securitisation Act. New rules were then introduced in 2011 which provide rules regulating the taxation of income derived by a securitization vehicle together with the deductions which a securitization vehicle may be entitled to in terms of Malta’s income tax legislation.
A securitization transaction is a transaction whereby a securitization vehicle, directly or indirectly:
(a) acquires securitisation assets from an originator by any means, or
(b) assumes any risks from an originator by any means, or
(c) grants secured loan or other secured facility or facilities to an originator,
and finances any or all of the above, directly or indirectly, in whole or in part, through the issue of financial instruments, and includes any preparatory acts carried out in connection with the above.
A securitisation vehicle may be:
(a) a company, including an investment company;
(b) a commercial partnership;
(c) a trust created by a written instrument; or
(d) any other legal structure which the competent authority may, by notice, permit to be used for a securitisation transaction,
established under the laws of Malta or those of a jurisdiction recognised by the competent authority.
A securitisation vehicle is generally subject to income tax on its income and gains (after allowing any allowable deductions which such a vehicle may be entitled to) arising in the year in which such income or gains fall to be recognized for accounting purposes. However in terms of the rules issued in 2011, it is possible that no tax will be paid in Malta by the securitization vehicle.
Allowable deductions
In terms of the Rules issued in 2011, when determining the total chargeable income of a securitization vehicle, apart from claiming any allowable expenses in terms of the Income Tax Act, the following additional deductions may also be claimed:
a) any sum paid by the securitization vehicle to the originator or assignor for the transfer of the securitisation asset or the transfer of any risks;
b) any premiums, interest or discounts connected to the financial instruments issued, or funds borrowed by the securitisation vehicle when financing the acquisition of the securitization asset or the assumption of risks; and
c) any expenditure incurred by the securitisation vehicle in respect of the day to day administration of the securitisation vehicle (or if the administration is delegated, the fees paid for the administration services), including expenditure relating to statutory requirements, and of its assets and risks, including the collection of any relevant claims.
The Rules stipulate that any item of allowable expenditure in terms of both the Rules and the deductibility provisions (i.e. Articles 14 and 26 of the Income Tax Act) may be deducted only once. The Rules also grant the securitisation vehicle the option of claiming as a further deduction, an amount which is equivalent to any chargeable income remaining after deducting all allowable expenditure and any further deductions referred to above. This is referred as the “the Optional Deduction”.
The Optional Deduction effectively reduces the chargeable income of a securitisation vehicle to
Zero. In order for the said option to be exercised by the securitisation vehicle, the Maltese tax authorities must be satisfied that the originator or assignor has given his irrevocable, written consent to the exercise of such option.
Taxation of deemed income received by the originator/ assignor
In the event this option is exercised, the amount deducted by way of Optional Deduction will be deemed to be chargeable income in the hands of the originator or assignor of the particular securitisation asset. The said deemed income should be considered to be income arising in Malta and therefore taxed in Malta unless the originator or the assignor is considered resident in Malta for Malta’s income tax purposes. If the originator or the assignor is not resident in Malta, then the income is not deemed to arise in Malta and therefore no tax will be due in Malta.
Accounting issues
In terms of the rules, securitisation vehicles must account separately for different securitisation contracts. Thus the chargeable income derived from each contract must be determined separately. Where the securitisation vehicle is constituted as a company, an amount equivalent to the Optional Deduction must be allocated to the final tax account of the company. Thus, any distribution of profits by the securitisation vehicle from the Final Tax Account, would not be subject to any further tax in Malta.
Restrictions and anti-abuse rules
The Rules restricts the surrendering and claiming of trading losses contemplated in Articles 16 to 22 of the ITA in the case of a securitisation vehicle. Thus, any trading losses suffered by a securitisation vehicle cannot be surrendered to another company forming part of the same group, while a securitisation vehicle cannot claim any trading losses suffered by another company within the same group of companies.
Furthermore, any losses made by an entity during a period in which it was a securitization vehicle cannot be deducted by such entity once it is no longer considered a securitisation vehicle. The Rules also contain a general anti avoidance provision to challenge transactions structured in a manner which have been carried out with the sole or main motive to obtain any undue tax advantage and which do not reconcile to the object and purpose of the Rules.
Disclaimer
This article contains general information only and is not intended to address the circumstances of any particular individual or entity. ACT, by means of this article is not rendering any accounting, business, financial, investment, legal, tax, or other professional advice or service. This article is not a substitute for such professional advice, nor should it be used as a basis for any decision or action that may affect your finances or your business. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Before making any decisions or before taking any action that may affect your finances or your business, you should consult a qualified professional adviser. ACT shall not be responsible for any loss whatsoever sustained by any person who relies on this article.