1st Amendment to the Income Tax Act

October 27, 2021

Executive Summary

The Maldives introduced the Income Tax Act (“ITA”) within the last quarter of 2019, extending its taxing rights from only business income to personal income. Taxes were imposed with effect from the 1st of January 2020, with major changes to the previous business taxation regime.

The Parliament approved the 1st amendment to the ITA in the parliamentary discussions held on 8th July 2021, and the President subsequently enacted the bill on 20th July 2021 which then came into effect. The 1st amendment provides clarity on certain areas which were uncertain when the ITA was initially passed. The 1st amendment introduced some new fundamental changes to the existing ITA and brought in some additional provisions to ease administrative and procedural matters.

One key inclusion would be the introduction of non-resident withholding taxes on Indirect Offshore Transactions (“OITs”) on occurence of certain events and the power granted to the President to grant exemptions on income tax imposed on certain business areas.

This memo provides a detailed discussion on some key changes to the income taxation regime brought by the 1st amendment, with specific focus on its impact to the business income earners.

Broader Definition of “Other Income”

The term “other income” is used as a sweeping term to define the types of income liable for income taxes. The definition of “other income” prior to the 1st amendment was relatively broad and included income or gains of any kind received for no consideration and, proceeds through a criminal or any other illegal activity. The 1st amendment further broadens this definition to include unexplained wealth (whether recorded in the books or not). 

Exempt Incomes 

It is accepted worldwide that tax law must be precise, clear and shall stipulate those incomes which fall within the scope of taxation and those that are exempt from taxation.

The 1st amendment replicates incomes exempted from employment incomes, as previously provided in the Income Tax Regulation (“ITR”). Apart from these, the 1st amendment exempts the following types of income in the computation of a person’s taxable income; 

Basic pension, retirement pension received under the Maldives Pension Act along with annuities are now exempted from taxable income Profits received by a resident partner from a resident partnership were exempt income
prior to the amendment. The 1st amendment adds interest on partners’ capital as an exempt income from the enactment date of this amendment
Limitation on exemptions on the income arising on the disposal of a person’s sole or principal private residence Clarity on exclusion (exemption) of pension
paid by the employer to the Maldives Pension Administration Office from employment income.
Annuities Interest on partners capital Sale of principal private residence Pension contribution by employer

President's Powers on Tax Exemption 

One key change included in the 1st amendment is the power granted to the President to exempt certain business areas from income taxes. Though a detailed procedure on the application and granting mechanism is not provided, the 1st amendment requires the Ministry of Finance (“MoF”) to issue a regulation on these along with business areas eligible for income tax exemption, within 3 months from the ratification of the 1st amendment. 

Business areas eligible for exemption

  • President with the recommendation of the cabinet determines the business areas eligible for Income Tax exemption.
  • MoF is to issue a detailed regulation by 18th October 2021 and publish the business areas eligible for tax exemption along with other procedural clarity.
  • MoF can include conditions and obligations on those who wish to apply for tax exemption and for continuation of tax exemption.

Procedure for tax exemption

  1. Government Office responsible for the business area submit a request to the MoF, requesting for exemption.
  2. President grants the exemption for a specified period at his discretion after considering the (1) Impact on Government budget; (2) Economic or social benefits (3) Likelihood of attainment of the exemption purpose. 
  3. Within 14 days of awarding the exemption, the MoF shall publish the exempt businesses, exemption period and reason for exemption in the Government Gazette.

Obligation on the business

Must register a separate legal entity for the exempted business area with Ministry of Economic Development. 

Obligation on the MIRA

Must conduct an audit of the exempted business activity and report the findings to the MoF and the exempted business.

Circumstances in which the exemption can be voided

  1. Providing incorrect information during the application process. 
  2. Cessation of the business activity or conducting a different business activity under same business name. 
  3. Criminal judgment being passed against the exempted business. 
  4. Upon achievement of the exemption purpose or reasonable ground to believe the purpose is unachievable. 
  5. Reasonable ground to believe a possibility for a direct or indirect financial or non-financial loss to the government apart from the taxes foregone.

Allocation of Tax-Free Threshold

A tax-free threshold of MVR 500,000 (≈USD 32,425) is applicable for a full accounting period of 365 days for persons other than individuals and banks, while any taxable income exceeding this limit is taxed at a flat rate of 15%.

Companies within a group who are required to have their financial statements consolidated under IFRS 10, were allowed a single tax-free threshold which needs to be allocated equally to each company prior to the 1st amendment. Entities which are not companies were excluded from this condition even if they were required to consolidate their accounts.

However, the 1st amendment requires a single tax-free threshold to be allocated to any entity (excluding individual or bank), who are required to consolidate their financial statements, including any partnerships, trusts or any other legal form.

Group A consist of the following entities and is required to consolidate their accounts for the accounting period ending on 31st December 2020 and 31st December 2021. Company C was formed on 1st December 2020.

Group A is allowed a single tax-free threshold of MVR 500,000 for each accounting period. The below table summarizes the tax-free threshold for each entity for the accounting period ending on 31st December 2020 (prior to 1st amendment) and the accounting period ending on 31st December 2021 (after the 1st amendment).

# Entity For the accounting period 2020 (prior to 1st amendment) For the accounting period 2021 (after 1st amendment)
1 Company A MVR 166,667 MVR 125,000
2 Company B MVR 166,667 MVR 125,000
3 Company C MVR 13,699* MVR 125,000
4 Company D - -
5 Partnership A - MVR 125,000
  Total (MVR) MVR 347,033 MVR 500,000

 *Since company C was formed on 1st Dec 2020, the total number of days in existence is 30 days for the accounting period ended 31st Dec 2020.

Capital Gains and Losses

In simple terms, a capital gain is any rise in value of an asset. When there is a change in ownership of an asset (normally through a sale transaction), the capital gain is realized. The ITA differentiates between gain and losses arising on assets, whether it is a movable, immovable, intellectual, or an intangible asset, which are eligible for capital allowance and those that are not eligible for a capital allowance. 

A capital gain or loss for the purpose of ITA, would only arise on those assets which are not eligible for capital allowance, for example gains or losses arising from a sale of shares in a company.

While capital gains should be considered as part of the taxable income (with limited exemption for non-business income earners), a capital loss arising on the disposal of a capital asset can only be offset against a capital gain which arose in the same accounting period as the capital loss. 

Any unadjusted capital losses can be carried forward to future accounting periods. While there was no time limit to carry forward these losses prior to the 1st amendment, any unclaimed capital losses may now be carried forward to a maximum of 5 years from the accounting period in which it was incurred.

It also stipulates that these unclaimed losses should be claimed in the order in which it was incurred.

Non-Resident Withholding Tax on Non-resident Contractors 

One major change introduced in 2019 via the enactment of the ITA, was the imposition of Non-Resident Withholding Taxes (“NWT”) at the rate of 10% on any payments made towards a non-resident contractor.

The term, “non-resident contractor” was defined in the ITA as performance of any service in the Maldives or the supply, the use of, or right to use, of any service in the Maldives by a non-resident in the Maldives (other than as an employee).

The change was effective for any payments / payables made on or after 1 January 2020, irrespective of the date on which the initial agreement was made. This change impacted significantly on all non-resident contractors in the Maldives, having to bear an unanticipated financial burden, as NWT at the rate of 10% were imposed on the gross revenue of these contractors.

Though the NWT imposed on these payments were allowed as a deduction while filing the final income tax return by the non-resident contractor (assuming they have a PE in the Maldives), they were only able to recover these at the end of the financial year and upon submission of the Final Income Tax Return, due by the 30th of June of the following tax year.

The 1st amendment lessens this burden by reducing the NWT rate on payments made to non-resident contractors to 5%, effective 20th June 2021.


Company A who owns and operates a tourist resort in the Maldives carries out a renovation of the tourist resort. Part of the renovation was to upgrade and modernize the outdoor furniture at the resort. Company A assigns a Singapore-based entity for the purchase of new materials for these furniture and for installation and assembly of these at the resort for a total contract value of USD 1,000,000.

The fact that the contract was exercised in the Maldives, qualifies the whole contract to be a “non-resident contractor”, which results in Company A having to withhold and pay 5% of the invoices raised by the Singapore based entity on this contract on or after 20th June 2021.

Non-Resident Withholding Tax on Re-Insurance premium, Commission and Telecommunication Services 

Insurance premium, including any payments made for re-insurance premiums were liable for NWT starting from 1 January 2020. These were not liable for withholding taxes under the previous Business Profit Tax regime which ended on 31st December 2019.

Prior to the 1st amendment, insurance premiums were liable for NWT at the rate of 10%, while re-insurance premiums were liable for NWT at a reduced rate of 3%.

However, the 1st amendment ends the requirement to withhold NWT on re-insurance premiums, but payments made towards insurance premiums are still liable for NWT at the initial rate of 10%.

Any commission charged for a service provided in the Maldives was liable for NWT at the rate of 10% without any exclusion under prior to the 1st amendment. However, the 1st amendment excludes commissions charged by a bank in relation to a transfer or deposit of money, and any commission charged by the bank for the use of a card issued by the bank.

Furthermore, for telecommunication service providers, payments for any inter-carrier charges between the telecom operators are no longer liable for NWT upon the ratification of the 1st amendment.

Non-Resident Withholding Tax on Offshore Indirect Transfers

The 1st amendment introduces a new concept of NWT applicable on offshore indirect transfers (“OITs”). In essence, OITs are defined as the sale of an entity owning an asset located in one country by a resident of another.

To be more precise, OITs are transfers in which the transferor (seller) is resident for tax purposes in a different country from that in which the asset in question is located, and the transferor does not have a PE in the country in which the same asset is located.

It is widely accepted by both the Organization for Economic Development (“OECD”) and UN Model Treaty that capital gains arising on OITs of “immovable” assets can be imposed by the country in which the “immovable” asset is located. The provision introduced in the 1st amendment is similar to what’s recommended by a OITs toolkit1 jointly issued by the IMF, OECD, UN and World Bank Group. It is crucial to note that the new provision not only covers OITs relating to an immovable property located in the Maldives but to transfer of intellectual or intangible properties used or registered in the Maldives.

The rule simply follows Model 2 prescribed in the above OITs toolkit, proposing to tax the transaction via a non-resident assessing rule. In summary, where there is OITs arising in relation to an immovable property, intellectual or intangible property located or registered in the Maldives, and the seller is a non-resident, the buyer shall withhold 10% of the purchase price and settle such taxes earlier of the payment date or the date in which the ownership of the asset is transferred to the buyer by submitting of MIRA 608 form to MIRA and settlement of taxes. 

The rules also ensure that both the seller and buyer are jointly responsible for the settlement of the taxes to MIRA where the buyer doesn’t withhold and settle the relevant taxes to MIRA by the due date. A simple example is illustrated below: 


Company A owns several free-hold land in the Maldives. Individual A owns 95% shares of Company A, with the balance 5% being owned by Company Z.

Individual A wishes to sell his shares at Company A to Individual B for a consideration of USD 5,000,000. The transaction was concluded and the shares of Individual A were transferred to Individual B on 15th May 2021. Individual B settled the whole payment on 9th May 2021.

Individual B must withhold 10% from the purchase price (USD 500,000), while making the payment to Individual A and pay it to MIRA by submitting MIRA 608 form on or before 9th May 2021.

Where individual B fails to withhold and declare the taxes by 15th May 2021, the obligation to declare and pay taxes falls onto Individual A, as the ownership of the asset was transferred to Individual B on 15th May 2021.

Where both Individual A and Individual B fails to declare and settle taxes on this transaction by the final return due date of the relevant accounting period, i.e. 30th June 2022 (due date to submit the final return of accounting period 2021), then being the owner of the immovable property, Company A must declare and settle taxes at the rate of 10% to MIRA.

It is evident from the above discussion that OITs necessarily require two or more tax jurisdictions in play. When two or more tax jurisdictions compete on claiming taxing rights on the same transactions, the bilateral or multilateral tax treaties are crucial to determine which country has the taxing right and ensuring that the transaction is not double taxed.

However, since Maldives have very little exposure to bilateral and multilateral tax treaty networks, ensuring eligibility of foreign tax credit and prevention of double taxation is something which needs to be evaluated on these transactions. However, on 11th August 2021, the Maldives signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (“MAAC”), allowing the Maldives Tax Authority to engage in the exchange of information with 143 other member tax jurisdictions, including all major financial centers.

In a nutshell below are the key changes made to the non-resident withholding tax mechanism upon enactment of the 1st amendment.

Payment Category Prior to 1st amendment After 1st amendment
Non-resident Contractor Subjected to NWT at the rate of 10% Subjected to NWT at the rate of 5%
Re-Insurance Premium Subjected to NWT at the rate of 3% Not liable for NWT
Bank Commission Subjected to NWT at the rate of 10%, under the category of commission paid in respect of a service supplied in the Maldives Not liable for NWT
Interconnection Charges on Telecom Industry  Subjected to NWT at the rate of 10%, under the category of Royalty Not liable for NWT

Permanent Establishments

Noteworthy changes were brought to as what constitutes a Permanent Establishment (“PE”), deductibility of Head Office expenses in the taxable income computation and the computation and settlement of Interim payments.

PE Definition

  • Reduced the limit that could trigger a PE in the Maldives, in respect of a building site, construction, assembly or installation project from 6 months to 90 days.
  • Introduced an anti-fragmentation rule to tackle the issue of contract splitting for the purpose of artificially avoiding the PE threshold. Under the new rule, similar or connected projects carried out by the same person including its associates shall be considered as one to determine the 90 days threshold.
  • The negative list (activities that will not trigger a PE such as a facility being used solely for storage, display or delivery of goods or merchandise) which was previously in the ITA, was removed via the 1st amendment. 

Head Office Expense deductions for PEs 

Similar to the provisions of the Business Profit Tax Regulation (“BPTR”), the ITA allows deductibility of head office expenses in computation of the taxable income of a Permanent Establishment (“PE”) in the Maldives to a certain extent.

While head office expenses include all expenses incurred by the Head Office (including its associates) for the operation of the PE in the Maldives, the ITA allows these expenses to be capped to a maximum of 3% of the gross revenue generated from the general course of business.

Prior to the 1st amendment, all head office expenses irrespective of the nature of the transaction can be deducted from the computation of taxable income, if they were within the threshold provided above. However, the 1st amendment restricts any deduction in relation to; 

  • Royalty payments for a patent or right
  • Any commission payments for any service including management services.

Interium Return

Section 27(a) of the ITA allows a PE to make an election to declare income taxes on gross basis (i.e. to exclude incomes which has already suffered NWT). The 1st amendment issues clarification, that where a PE has elected to declare income taxes on gross basis, NWT suffered on the income cannot be deducted in the computation and settlement of the interim payments of the PE. 


With the enactment of the 1st amendment and recent changes to the taxation rules, the Maldives is moving to build a more globally acceptable and transparent taxation system which ensures their taxing right on all incomes sourced in the Maldives. 

However, though the 1st amendment issues clarity on some of the matters which were previously unaddressed, clarity on administrative and procedural matters are yet to be provided in relation to some of the new concepts introduced via the 1st amendment, such as the non-resident withholding taxes on OITs.


download icon1st Amendment to the Income Tax Actdownload icon