Introduction 

Capital Gains arising on or after 1 January 2020 are considered as part of taxable income with the enactment of Income Tax Act (“ITA”) on 17 December 2019. Pursuant to Section 3(l) of the ITA, a gain derived from the disposal of movable, immovable, intellectual or intangible property in respect of which a deduction for capital allowance is not allowed is referred as capital gains. 

In order to ensure taxes payable on such disposals are collected in the Maldives, the ITA has introduced special reporting obligations on both the buyer and seller where specific events are expected to occur which might trigger a capital gain or dilution of tax base. 

This advisory memo covers the obligations on the buyer and the seller arising on sale of shares of a company, partnership, or trust whose value is directly or indirectly derived through an immovable property situated in the Maldives with reference to a hypothetical scenario. 

Transaction 

Introduction:
Company A holds 50% shares of Company B. Company A is a company incorporated in Sri Lanka and is a non-resident in the Maldives. 

Company B holds the lease hold rights of the Island in Male’ Atoll. Company C wish to buy the shares held by Company A in Company B for a total consideration of USD 5 million. 

For ease of reference, Company A is the seller and Company C is the buyer to this transaction. 

Assumptions:
More than 50% of the value of Company B is directly or indirectly derived by the leasehold rights of the Island in Male’ Atoll. 

Assume that the transaction was executed on 1st Nov 2021 and the payment was settled by the buyer on the same date. 

Special Circumstances Under Which Commissioner General May Require Filing and Settlement of Tax Returns 

Introduction

Pursuant to section 48 of the ITA, where certain events are expected to occur, the Commissioner General may require the taxpayer to submit a tax return and settlement of taxes in relation to these events. 

When is it applicable? 

1. Leaving the Maldives to live abroad permanently or Leaving the Maldives for employment, where the employment period exceeds 5 years.  
2. Cease to be resident in the Maldives
3. Terminate permanent establishment in the Maldives
4. Transfer of assets attributable to a permanent establishment in the Maldives to its head office or another permanent establishment outside the Maldives 
5. Transfer of assets attributable to the persons head office in the Maldives to a permanent establishment of the person outside the Maldives
6. Transfer of MVR 10 million or more of funds or assets out of Maldives 
7. Disposal of shares or any interest in a company, partnerhsip or trust and at the time of disposal more than 50% of the value of the entity is directly or indirectly related to an immovable property situated in the Maldives. 

Registration, Filing and Payment Process: 

(Please refer to our memo attached) 

Non-Resident Withholding Tax ("NWT") on Offshore Indirect Transfers (OITS) 

Introduction

Pursuant to section 50-1 of the ITA, where a specific event (defined as Offshore Indirect Transfers (“OITs”)) is expected to occur and the recipient of the transaction is a non-resident in the tax year, then the buyer is required to pay taxes to MIRA via a withholding tax mechanism. 

When is it applicable?

1. Disposal of an immovable property situated in the Maldives
2. Disposal of a share or any interest in a company or partnership or trust which is resident in the Maldives
3. Disposal of a share or any interest in a company, partnership or trust, where at the time of disposal of such share or interest, during anytime at the past 365 days, more than 50% of the value of company, partnership or trust is directly or indirectly related to an immovable property situated in the Maldives 
4. Disposal of an intellectual or intangible property used or registered in the Maldives or income derived under an agreement made in the Maldives for the disposal of such property. 

Registration, Filing and Payment Process

(Please refer to our memo)

Other Legal Considerations 

Pursuant to section 127 of the 3rd amendment to the Income Tax Regulation (“ITR”), both head lease and sub lease rights of an immovable property falls within the definition of Immovable property. 

This amendment gives further clarity that where the company holds a right over an immovable property and the value of the company is derived by this right, then it qualifies as value being derived by an immovable property. 

Application to the Transaction 

The transaction falls within the scope of event 7 of section 3 (Special circumstances under which commissioner general may require filing and settlement of tax returns) and event 3 of section 4 (“Non-Resident Withholding Tax On Offshore Indirect Transfers (OITS)). 

Hence, the buyer is required to submit and settle NWT and seller is required to file and settle Income Tax returns to MIRA as stipulated in the above timelines. 

Obligation to the seller (“Company A”) under section 3

Submit an Income Tax Return (including all revenue generated till that date and the income generated by execution of the transaction) by 17th October 2021. Settle the taxes payable as per the Income Tax Return by 24th October 2021. 

(Please refer to our memo)

Obligation to the buyer (Company C) under section 4 

The buyer must withhold 10% of the purchase consideration (USD 500,00) at the time of settlement of the consideration to the buyer and settle such to MIRA by submission of MIRA 608. If the buyer is not registered in the MIRA, the buyer is required to submit a copy of the registration certificate along with the tax return. 

(Please refer to our memo)