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Value Added Tax on rental income

Value Added Tax on rental income

The provisions of the VAT Act state that the letting of immovable property is exempt without credit - no VAT needs to be charged and none may be claimed. However, there are a number of exceptions to this provision. The exceptions relating to the chargeability of VAT include the type of tenant, the determination of whether the tenant is undertaking an economic activity, and whether the provision of accommodation is to a “tourist”.
May 31, 2016

“Tourist”

The Malta Travel and Tourism Services (MTTS) Act defines a “tourist” means any person who is travelling to and staying in places outside his usual environment for not more than one consecutive year for leisure, business and other personal purpose other than by taking up employment or to establish a business in the place visited. Should the tenant fall under the “tourist” definition, the property will need to be licensed by the Malta Tourism Authority (MTA).

Types of licences

The MTA issues two types of licences for residential units, namely the “House on Long Lease Licence” and the “Holiday Furnished Premises Licence”.  The latter licence is mainly targeted at short-lets. The property owner who opts for the “Holiday Furnished Premises Licence” may seek to upgrade the property to the “Comfort” category by satisfying a number of requirements (which generally entails an investment of between €300 to €2,000) and meeting certain health and safety prerequisites such as an onsite fire extinguisher, fire blanket, smoke detector, and emergency lights.

Upon the property being licensed, VAT is to be charged at the rate of 7% on said “tourist” accommodation.

“Tourist” versus EU resident

A strict interpretation of the current regulations indicates that persons who have resided in Malta for over a year are no longer defined as a “tourist”.  The property owner would then have no further cause to impose the 7% VAT subsequent to the first year.

An interesting point was raised by Dr Simon Busuttil, then a MEP, regarding VAT on rental income from EU nationals who have been in Malta for less than a year. In his article, published in the Times of Malta on 17 August 2011, Dr Busuttil wrote “As to the imposition of VAT, this requirement is intrinsically tied to the need of obtaining a licence under MTTS law. However, treating Maltese and EU citizens differently for VAT purposes may indeed give rise to problems. This seems to be the case with EU citizens living in Malta as their primary place of residence since they are required to pay VAT on accommodation during their first year of residence whereas there is no such obligation in the case of Maltese nationals.”

Dr Busuttil concludes with “To my mind, in this case, the same treatment should apply to the EU citizen. This means that EU citizens who come to live in Malta as their primary residence should not need to be required to stay in a licensed place or pay VAT on the same basis as tourists in their first year because there is no such requirement for Maltese nationals.”

Tenant undertaking economic activity

In the scenario where the Lessor is a limited liability company renting a property to a person registered under Article 10 of the VAT Act, VAT will be charged at 18% for rentals.  The tenant undertaking an economic activity from the premises may then be able to claim the VAT element paid on the rentals.

Lessor is an individual

If a property owner’s rental income is less than €14,000 per annum, then that property owner may register to be VAT exempt (under Article 11 of the VAT Act).  However, if the rental income exceeds €14,000 per annum, then the property owner will need to register under Article 10 of the VAT Act.

If the individual is liable to charge VAT, the respective VAT rates are:

  • Malta resident tenants                                                                            0%;
  • Tenants  deemed “tourists”                                                                    7%; or
  • Article 10 registered persons undertaking an economic activity   18%

Lessor is a company

If the Lessor is a limited liability company, the respective VAT rates are:

  • Malta resident tenants                                                                              0%;
  • Tenants deemed “tourists”                                                                       7%; or
  • Article 10 registered persons undertaking an economic activity    18%.

Disclaimer: The above is presented solely for information purposes, and is not deemed as tax advice. Casa Rooms is not to be held responsible for the information presented above. It is recommended that you consult your advisor to assess which is the appropriate tax structure.

About

An accountant by profession, and having worked with a business advisory team of one of the Big Four global practice firms, Thomas began to yearn for that entrepreneurial challenge. With his number-crunching abilities and zest for research mixed with his passion for real estate, the opportunity arose to assist property Owners to maximise the return from their Properties.

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