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Budget Measure on Withholding Tax on Assignments of Rights acquired under a Promise of Sale Agreement

Publication Date: Jan 24, 2020
 
One of the budget measures for 2020 refers to the taxation of income derived from assignments of rights acquired under a promise of sale agreement (ċessjoni ta’ konvenju).
 
The measure applies to assignments made as from 1 January 2020 and the relative legislation will be made retroactive to that date. In the meantime, notaries and advocates who authenticate such assignments are to withhold tax and to remit it to the Commissioner for Revenue in the same manner as the final tax withheld on transfers of immovable property.
 
The tax is to be withheld from the consideration paid for the assignment after the following deductions:
  • Brokerage fees, if any, paid by the assignor to the extent that they result from documentary evidence and are supported by a receipt
  • Where the assignor had acquired the rights in terms of a prior valid assignment, any sum paid by him to the previous assignor to the extent that it results from that assignment and is supported by a receipt
 
The tax is to be withheld at the following rates:
  • On the first €100,000, at 15%
  • On the rest, at 7% Provisional Tax (See Examples Below)
 
Example 1:
Consideration received from cession of right on promise of sale amounting to €50,000 & paid agency fees of €2,000 (deductible if the conditions stipulated in Rule 3 of Subsidiary Legislation 123.92 Tax on Property Transfers Rules are satisfied).
15% final withholding tax applies on the €50,000 - €2,000 = €7,200


Example 2:
Consideration received from cession of right on promise of sale amounting to €130,000 & paid agency fees of €5,000 (deductible if the conditions stipulated in Rule 3 of Subsidiary Legislation 123.92 Tax on Property Transfers Rules are satisfied).
The agency fees are to be worked out pro rata, so, €100,000 x €5,000 / €130,000 = € 3,846. 
15% final withholding tax applies on €100,000 less the brokerage fees (pro rata) €3,846 = €96,154 x 15% = €14,423.
7% provisional capital gains tax applies on €30,000 = €2,100.
The rest of the brokerage fees amounting to €5,000 - €3,846 = €1,154 will be claimed as a deduction when computing the gains or profits in the tax return of the transferor.  
The €30,000 shall be deemed to be gains or profits derived from a trade, business, profession or vocation falling within the scope of Article 4(1)(a) of the Income Tax Act to be declared in the tax return.

Note:
A person has entered into various promise of sale agreements example 5 flats or 5 airspaces in the same building, which he is no going to cede in favour of third parties. That person is entitled to pay 15% final withholding tax on the first € 100,000 of each cession of right on promise of sale provided that, that right is being acquired by different people.

The provisions requiring such assignments to be made in writing and authenticated by a notary or an advocate will remain unchanged.