Income Tax Act (Cap. 123), article 14

14. (1) For the purpose of ascertain ing the total income of any person there shall be deducted all outgoings and expenses incur red by such person during the year p receding the year of assessment to the extent to which such outgoing s and expenses were wholly and exclusively incurred in the produ ction of the income, including - (a) borrowing costs incurred by such person where the Commissioner is satisfied that they were wholly and exclusively incurred for the p u r p o s e o f t h a t p e r s o n ’ s trade, business, profession or vocation, or on capital employed for the purpose of acquiring income: Provided that the deduction allowable under this paragraph shall be subject to such limitations, and may be carried forward, in such manner as may be prescribed and in accordance with guidelines issued under article 96(2); (b) rent paid by any tenant of land or buildings occupied by him for the purpose of acquiring the income; (c) any sum expended for repairs of premises, plant or machinery employed in acqui ring the income, or for the renewal, repair or alteration of any implement, utensil or article so employed; (d) bad debts incurred in any trade, business, profession or vocation, proved to the satisfaction of the Commissioner to have become bad during the year immediately preceding the year of assessment notwithstanding that such bad debts were due and payable prior to the commencement of the said year: Provided that all sums recovered during the said year on account of amounts previously written off or allowed in respect of bad debts shall for the purposes of this Act be treated as r eceipts of the trade, business, profession or voca tion for that year; (e) any sum contributed by an employer to a pension, saving, provident or any other society or fund which may be approved by the Commissioner as may be prescribed; (f) a deduction in respect of th e wear and tear of any plant and machinery, and any premises being an industrial building or structure, arising out of the use or employment of such property in the production of the income; and where such property is employed on such terms that the burden of wear and tear thereof falls upon the person making use of the property in the production of the income, but such property does not belong to him, he shall be entitled to any deduction to which he would have been entitled had the property belonged to him: INCOME TAX [CAP. 123. 91 Provided that - (i) the amount to be deducted in respect of premises being an industrial building or structure shall not exceed two per cent of the cost thereof, not including the cost of the land on which the building or structure is erected; (ii) where the total deductions allowable under this paragraph and under paragraph ( j) cannot be given effect to in full in any year because there are no profits or gains chargeable for that year from the source of income in respect of which they are allowable or because the profits or gains chargeable from that source are less than the deductions, the deductions or such part of the deductions to which effect has not been given, shall be added to the de duction for wear and tear in respect of that source for the following year and deemed to be part of that deduction, or if there is no such deduc tion in respect of that source for that year, be deemed to be the deduction for that year and so on for subsequent years; (iii) the aggregate of the deductions made under this paragraph and under paragraph ( j), added to the wear and tear, if any, or to such part thereof as may be appropriate, which occurred prior to the commencement of this Act, shall not exceed the o r i g i n a l c o s t , o r s u c h p a r t o f i t a s m a y b e appropriate, of such plant, machinery or premises, having regard to the extent to which t h e y w e r e w h o l l y a n d e x c l u s i v e l y u s e d i n t h e production of the income, and - (a) the wear and tear which occurred prior to the commencement of this Act shall be computed at the prescribed rates, and (b) the cost of the land on which the building or structure is erected shall in all cases be excluded from the original cost of the premises; (g) the amount of a loss incurred by any person, solely or in partnership, in any trade, business, profession or vocation during the year preceding the year of assessment which, if it had been a profit, would have been assessable under this Act; and in computing such loss account shall be taken of all deductions which would have been allowable under the other paragraphs of this sub-article, except paragraphs (f) and ( j), if it had been a profit; and where the amount of a loss i n c u r r e d a n d c o m p u t e d a s a f o r e s a i d i s s u c h t h a t i t cannot be set off against capital gains or income from other sources for the year p r e c e d i n g t h e y e a r o f 92 CAP. 123.] INCOME TAX assessment, it shall, to the extent to which it cannot be wholly set off against capital gains or income for the said year, be carried forward and set off against what would otherwise have been the total income for subsequent years in succession: Provided that nothing in this paragraph shall be construed as permitting the set off of any loss incurred outside Malta which, if it had been a profit and had been retained outside Malta, would not have been chargeable to tax under this Act: P r o v i d e d f u r t h e r t h a t a l o s s a s a f o r e s a i d s h a l l n o t b e deducted against income which stands to be allocated to the final tax account and any loss resulting from activities or sources the profit derived from which would have been allocated to the final tax account shall not be a loss to which this paragraph applies: Provided also that, subj ect to the "group relief provisions", no person shall, notwithstanding anything contained in any other Act, be entitled to a deduction under this paragraph in respect of any loss incurred by another person: Provided also that: S.L. 123.140 (i) where any merger or division referred to in the Rulings (Income Tax and Duty Treatment of Mergers and Divisions) Rules is being effected for bona fide purposes to the satisfaction of the Commissioner; and (ii) as a result of such merger or division, a trade or business previously car ried on by a company or other person involved in the particular merger or division (hereinafter ref e r r e d t o a s " t h e F i r s t Company") or any part thereof, shall thereafter be carried on by another company or companies or other person involved in such merger or division (hereinafter co llectively referred to as "the Second Company"); and (iii) the First Company is entitled to any loss or to the balance of any loss incurred by the First Company in any year p receding the year of assessment or to any wear and tear or initial allowances, or to the balance of any such allowances due in respect of any year as aforesaid; the Commissioner shall be entitled to grant his permission for the losses and, or wear and tear and, or initial allowances or such p art thereof as he may deem fit, in the light of the trade or business or any part thereof which shall thereafter be carried on by the Second Company, to be claimed by the Second Company and to be set-off against its gains or profits as the case may be in determining its chargeable INCOME TAX [CAP. 123. 93 income, in lieu of the First Company. In granting his permission the Commissioner may impose such conditions as he deems fit and reasonable, and where the person who has requested permission accepts the conditions laid down by the Commissioner, such conditions shall be operative notwithstanding any other provisions of this Act. (h) any expenditure on scientific research incurred by a person engaged in any trade, business, profession or vocation and proved to the satisfaction of the Commissioner to have been incurred for the use and benefit of the tra de, business, profession or vocation: Provided that any such e xpenditure of a capital nature, unless it is an expenditure in respect of which a deduction is allowable under paragraphs (f) and (j), shall be spread equally ove r the year in which it has been incurred and the five succeeding years: Provided further that no deduction shall be allowed under the provisions of this paragraph in the case of any such expenditur e on plant or machinery or premises, in resp ect of which any deduction is allowed under paragraphs ( f) and ( j). For the purposes of this paragraph "scientific research" shall include: (i) basic research comprising activities undertaken for the advancement of scientific or technological knowledge; (ii) applied research where a specific application is in view; (iii) development work involving the use of the results of basic and applie d research as aforesaid for the purpose of creating new or improving existing materials, devices, products or processes. (ha)* (i) any expenditure incurred, at one hundred and seventy-five per cent (175 %) of the actual amount of such expenditure, on research, development and innovation activities by a person engaged in any trade, business, profession or vocation and proved to the satisfaction of the Commissioner to have been incurred for the use and benefit of the trade, business, profession or vocation: Provided that any such expenditure of a capital nature, unless it is an expenditure in respect of which a deduction is allowable under paragraphs (f) and (j), shall be spread equally over the year in which it has been incurred and the five (5) subsequent years: *Applicable from the year of assessment 2027. Vide Article 13(2) of Act III of 2026 . 94 CAP. 123.] INCOME TAX Provided further that no deduction shall be allowed under the provisions of this paragraph where such expenditure relates to plant or machinery or premises, in respect of which any deduction is allowe d in accordance with paragraphs (f) and (j); (ii) this paragraph shall apply from such date as may be provided by the Minister responsible for finance by notice in the Gazette; (iii) the Minister responsible for finance may by rules define the activities that constitute research, development and innovation for the purposes of this paragraph as well as prescribe such other conditions as may be applicable to this paragraph; (i)( Deleted by: XV . 2016.16 ). (j) in respect of plant and machinery first used and employed in the year immed iately preceding the year of assessment, an initial deduction of one-fifth of the capital expenditure thereon, and in respect of premises being an industrial building or structure first used and employed in the year immed iately preceding the year of assessment, an initial deduction of one-tenth of the capital expenditure thereon: Provided that deductions made under this paragraph shall be restricted, set off and carried forward as laid down in the second and third provisos to paragraph ( f): Provided further that the deduction contemplated by this paragraph in respect of plant and machinery shall no longer be applicable with effect from such year of assessment as may be determined by the Minister by order in the Gazette; (k) any sum or expenses proved to the satisfaction of the Commissioner to have been paid or incurred by or on behalf of a candidate for election as member of the House of Representatives o n account of or in respect of the conduct or management of such election: Cap. 354. Provided that such deduction shall only be allowed in the case of an elected candidate and shall not exceed the maximum amount of expenditure permissible under the General Elections Act , in respect of one candidate or the amount actually incurred by such candidate, whichever is the lesser; (l) any expenditure incurred by a person engaged in a trade, business, profession or vocation for the purpose of promoting that trade, business, profession, or vocation including any expenditure on market research and obtaining market information, advertising or other means of soliciting business, providing samples, and participating in fairs and exhibitions; (m) any expenditure of a capital nature on intellectual INCOME TAX [CAP. 123. 95 property or any intellectua l property rights incurred by a person and which intellect ual property or intellectual property rights are proved to the satisfaction of the Commissioner to have been used or employed in the production of the inc ome of such person: Provided that any such expenditure shall be spread equally over a number of years which shall not be less than a minimum period of three consecutive years, the first year being that in which the said expenditure has been incurred or the year in which the intellectual property or intellectual property rights is first used or employed in producing the income: * Provided further that, notwithstanding the first proviso, any such expenditure may be deducted in the year in which the said expenditure has been incurred or the year in which the intellectual property or intellectual property rights were first used or employed in producing the income of such person, subjec t to such conditions as may be prescribed: Provided also that when the intellectual property or intellectual property rights we re transferred to the said person ("the acquirer") by a company ("the transferor") and it was deemed in terms of article 5(9) that no loss or gain arose from that transfer, the total deduction that may be claimed by the acquirer shall be the lower of the cost of acquisition and the market value of the said property or rights as at the time of that transfer, reduced, in either case, by the amount, if any, that the transferor had claimed as a deduction in terms of this paragraph in respect of the property or rights that have been transferred; (ma) any expenditure of a cap ital nature incurred on or after 1st January 2025 by a person carrying on a trade, business, profession or vocation as consideration for the acquisition of a business permit or a concession, or a commercial lease, where the business permit or the concession or the commercial lease in question is used or employed in the production of income chargeable to tax in accordance with article 4(1)(a): Provided that: (i) in this paragraph, and subject to the other provisions thereof: "business permit" means a permit to carry on or operate a business that is issued by a public authority in accordance with any applicable law and it shall be deemed to have been acquired by a person if and when such person is registered as *Applicable from Year of Assessement 2024. Vide Regulation 8 (2) (b) of Act XIII of 2024. 96 CAP. 123.] INCOME TAX the holder thereof with the relevant public authority; "concession" means the privilege to carry on a business activity granted by a public authority that has exclusive rights over such activity; "commercial lease" means the lease of a commercial going concern ( twellija) or the lease of immovable property for the purpose of carrying therein a trade, business, profession or vocation and includes a sub-lease of a commercial lease; "public authority" means the government, a government ministry, department or government agency, or any other entity in which the government has, directly or indirectly, a controlling interest; (ii)the deduction shall not include any sum paid for, or attributable to the outright acquisition of a business or a business goodwill, or rights in accordance with an emphyteutical concession, or any intellectual property or rights to which paragraph (m) applies, or any other tangible or intangible asset other than the business permit, the concession or the commercial lease in question; (iii) no deduction shall be allowed in respect of the acquisition of a permit, concession or lease for an indefinite duration or for a duration of more than fifteen (15) years; (iv) the deduction shall only be allowable if the acquisition in question, including the payment of the consideration, results by means of a document in writing; (v) the deduction shall be spread in equal amounts over a period of fifteen (15) years or over the period, if shorter, for which the permit or the concession or the lease has been acquired by the person claiming such deduction; (vi) where the duration of the business permit or the concession or the commercial lease in question may be extended or renewed at the option of the person acquiring them or without the requirement for a payment of a capital nature by way of a further consideration, the periods for which they may be so extended or renewed shall be deemed to be part of their duration, and the provisions of sub-paragraphs (iii) and (v) shall INCOME TAX [CAP. 123. 97 apply accordingly; (vii) when, during the year immediately preceding a year of assessment, a person who had acquired a business permit or a concession or a commercial lease transfers, assigns or cedes that permit, concession, or lease, or sublets the leased property in question, or no longer uses or employs that permit, concession or lease in the production of income chargeable to tax in terms of article 4(1)(a), he shall not remain entitled to claim any further deduction in accordance with this paragraph, as from that year of assessment, in respect of such permit, concession or lease even though he may not have yet availed himself of the full deduction which otherwise may be granted in terms of this paragraph; (viii) when a person who has claimed a deduction under this paragraph transfers the permit, concession or lease in question, any deduction that he may be entitled to claim in respect of the price of the acquisition ("the cost of acquisition deduction") under the relevant provisions of this Act in the determination of the tax chargeable on such transfer or on the gains or profits derived therefrom, shall be reduced by the total amount that he has claimed as a deduction in terms of this paragraph in respect of the said permit, concession or lease, but the reduction shall not exceed the price of the acquisition deduction; (ix) no deduction shall be allowable under this paragraph in respect of the acquisition of a business permit, concession or commercial lease from a related party a nd for this purpose: - two (2) individuals shall be deemed as related parties if they are related within the degrees referred to in article 5A(4)(a)(i); - an individual and a company or other legal person shall b e t r e a t e d a s r e l a t e d parties if such individual holds, directly or indirectly, alone or together with any other related party or parties, more than twenty-five percent (25%) of the shares or voting rights or interest in such company or other legal person; - t w o ( 2 ) l e g a l p e r s o n s s h a l l b e deemed to be related parties if more than twenty- five percent (25%) of the shares or voting rights or interest in each of those legal persons are held, directly or indirectly, by the same persons; 98 CAP. 123.] INCOME TAX (x) capital expenditure incurred as consideration for the extension, renewal or modification of the terms and conditions o f the acquisition of a business permit, concession or commercial lease shall be allowable i n accordance with and subject to the provisions thereof to the same extent and in the same manner as if the said extension, renewal or m odification constituted a fresh acquisition; (xi) the Minister may by rules modify and increase the conditions and limitations to the right to a deduction under this paragraph and may modify the manner in which the deduction may be claimed. (n) any sum proven to the satisfaction of the Commissioner to have been paid by an employer to a licensed or registered childcare centre as fees in respect of childcare services for the children of his employees, up to a maximum of nine hundred and thirty- five Euro (€935) per child; (o) such sums in respect of risk capital as are aimed at approximating neutrality between debt and equity financing, as the Mini ster may prescribe. (p) a deduction not exceeding such percentage amount of qualifying income as may be prescribed derived from qualifying intellectual property (which term shall be defined in such manner as may be prescribed) may be claimed by any person entitled thereto, whether such i n c o m e a r i s e s i n t h e c o u r s e o f a t r a d e , b u s i n e s s , profession or vocation or otherwise, subject to the satisfaction of such terms and conditions and to obtaining such determinations as may be prescribed. (2) ( a) The Minister responsible for finance may make rules prescribing the method of calculating or estimating the deductions allowable under this article, and may by such rules also determine the amount of the deduction. (b) The Minister responsible for finance may by such rules also prescribe tax credits and deductions other than those listed in sub-article (1), and may also by such rules determine the class of persons to whom such tax credits or deductions shall apply and the method of calculating or estimating such tax credits or deductions and the amounts thereof. (3) Where any person incurs expenditure before he begins to carry on his trade or busin ess, and the expenditure - (a) is incurred not more than eighteen months before that time; and (b) is not deductible in ascertaining the trading or business income of that person, but would have been so deductible under sub-article (1) had it been incurred INCOME TAX [CAP. 123. 99 after that time, such expenditure as may be presc ribed shall be treated as incur red on the day on which the trade or business is first carried on by t hat person. (4) Where a person derives income from work carried out on or in relation to immovable property situated in Malta, consisting of brokerage and professional services, construction work, project management of construction work and work of tradesmen, or from the granting of loans or from any form of credit to finance the acquisition, development, construction, refurbishment, renovati on of immovable property or any right thereon and any other matter which increases or enhances the value of such immovable property or any right thereon, and such property is owned by a related person, the following shall have effect: (a) the income derived from the work, loans or credit, or from the transfer of such immovable property or any right thereon to which such work, loans, or credit is related, shall be deemed to constitute separate chargeable income for the purpose of this sub-article; (b) in determining the chargeable income derived from the said work, the total deductions allowable under this article shall not ex ceed the amount of the consideration received or r eceivable for the said work; and (c) in determining the chargeable income derived from the transfer of such immovable property or any right thereon, the total deduc tions allowable under this article shall not exceed th e consideration received or receivable for the said immovable property or right thereon, in so far that such excess consists of any amounts paid or payable in respect of the work, loans, or credit referred to in this sub-article. For the purpose of this paragraph any amounts paid or payable in respect of the said work, loans, or credit shall for the purpose of determining the chargeable income to be taken into account only after all other allowable deductions have been tak en into account: Provided that paragraph ( c) shall not apply with respect to income derived from loans or cre dit, where it can be proved to the satisfaction of the Commissioner that the amount paid or payabl e in respect of the loans or credit referred to in this sub-article reflects the amount that would have been paid or payable if the persons referred to in this sub-article were not related. For the purpose of this sub-article - (i) an individual is deemed to be related to another person if that other person is a body of persons of which the said individual is, directly or indirectly, a shareholder, partner or member; and (ii) two bodies of persons are deemed to be related persons if they are, directly or indirectly, controlled or beneficially owned as to more than 100 CAP. 123.] INCOME TAX twenty-five percent by the same persons. Cap. 406. (5) Notwithstanding the other provisions of this article, when a person incurs expenditure for a supply of goods or services in respect of which the supplier is required to issue a tax invoic e or other document in terms of article 50 or 51 of the Value Added Tax Act, no deduction shall be allowed under this article in respect o f that expenditure unless that person is in possession of a tax i nvoice or other document issued in accordance with the said article 50 or 51 and produces such tax invoice or other document if required to do so by the Commissioner. Alimony payments. Added by: XX.1996.8. Amended by: II. 2002.46; I. 2010.17; L.N. 218 of 2012. Substituted by: XII. 2014.17.