| Term | Definition | Key features / Legality |
| Tax Avoidance | Structuring one’s affairs to reduce tax liability within the law — using legal means, tax incentives, deductions, planning, treaty provisions, etc. | Legal, but may be challenged if it goes against the spirit of the law; sometimes considered “aggressive tax planning” or “abusive avoidance” if exploitative loopholes are used. |
| Tax Evasion | Deliberately breaking the law to reduce or avoid tax. Hiding income, misreporting information, using false documents, non-compliance with tax laws. | Illegal. Can lead to penalties, fines, sometimes criminal prosecution. |
Maltese Context: Legal Framework and How Malta Differentiates
In Malta, the distinction between avoidance and evasion is recognized in law, case law, academic literature, and administrative practice. Some key components:
1. Income Tax Act (ITA)
Maltese law includes provisions defining offences, penalties for fraud, misstatements, false documents, etc. Violations (e.g. false statements, falsifying books) are illegal and constitute evasion.
2. General Anti-Abuse Rule (GAAR) / Anti-Tax Avoidance Directive (ATAD)
Malta has transposed EU directives (e.g. ATAD) into its law, which include rules aimed at abusive tax practices. These attempt to curb aggressive tax planning (i.e. avoidance that pushes or skims lines of legality). For example, GAAR in Malta targets arrangements “whose sole or main purpose” is to obtain a tax advantage.
3. Other EU Obligations / Treaty Provisions
Malta has adopted the Multilateral Instrument (MLI) for modifying tax treaties to include anti-abuse standards. It has incorporated rules for treaty abuse, principal purpose tests, etc. These affect both avoidance and evasion practices.
4. Penalties & Criminal Sanctions
o If a taxpayer in Malta submits incorrect returns, fails to keep proper books, misleads authorities, or commits fraud, that’s evasion and may carry fines and imprisonment.
o There are also administrative penalties for other defaults (lateness, noncompliance, etc.), even if not rising to criminal levels.
How to Distinguish in Practice: Avoidance vs Evasion under Maltese Law
To decide whether a given arrangement is acceptable (avoidance) or unlawful (evasion or abusive avoidance), Maltese tax authorities and courts consider a number of factors:
• Legality of actions: Is what the taxpayer doing explicitly allowed under Maltese tax law (and relevant treaties)?
• Intention / motive: Was the purpose to reduce tax? Was there a main purpose to get a tax benefit?
• Substance over form: Even if documents are structured in a certain way, do the underlying economic realities support the claimed arrangement?
• Abuse of law / loopholes: Using provisions in ways clearly not intended by law, orexploiting gaps or mismatches (e.g. treaty-shopping, hybrid mismatches).
• Transparency and disclosure: Whether arrangements are disclosed; whether relevant information is properly reported.
Examples
Here are hypothetical examples adapted to the Maltese setting:
• Tax Avoidance Example: A company legally claims all available deductions and reliefs under Maltese law. It structures its financing so that interest deductibility rules are satisfied. It takes advantage of treaty provisions when setting up operations in Malta to avoid double taxation. All of this is disclosed, and the structure is compliant.
• Borderline / Aggressive Avoidance: The company uses hybrid entities or mismatched treaty provisions to shift profits or income in a way that, while not expressly illegal, appears contrary to the purpose of tax laws and treaties. For example, setting up entities in multiple jurisdictions to take advantage of mismatches so that payments that are taxable in one place are deductible in another, without real substance. These may be challenged under GAAR, EU rules or treaty-abuse provisions.
• Tax Evasion Example: Underreporting income, not keeping proper books, claiming false expenses, hiding assets abroad without declaring, etc. These are unlawful and can lead to criminal and civil penalties.
Recent Developments in Malta
To address gaps and ensure fairness, Malta has been active in implementing EU and international measures. Some highlights:
• Implementation of ATAD (EU Anti-Tax Avoidance Directive): Malta has transposed many measures including interest limitation rules, controlled foreign company (CFC) rules, exit taxation, GAAR.
• Treaty abuse / MLI: As mentioned, Malta ratified/implements the MLI to prevent treaty shopping and abuse.
• Flagging of tax-evasion as predicate crime for money laundering: Malta’s Financial Intelligence and Audit authorities make clear that tax evasion is criminal and that proceeds of tax evasion may amount to “proceeds of crime,” which can trigger anti-money laundering rules.
• Public perception & taxpayer behaviour: Studies have looked into how Maltese taxpayers view avoidance/evasion/compliance. For instance, one recent Master’sdissertation found that negative perceptions about tax (low trust, poor public services etc.) influence non-compliance and how people see avoidance vs evasion.
Challenges & Grey Areas
• What counts as “abusive” avoidance can be subjective: where is the line between smart tax planning and misuse of the law? The GAAR, treaty provisions attempt to draw that line, but disputes still occur.
• Complex international structures: With cross border operations, treaties, entities in multiple jurisdictions, hybrid mismatches, etc., it’s sometimes difficult to trace whether something is avoidance or evasion (or both).
• Enforcement capacity and detection: Authorities need sufficient resources and information exchange to identify evasion or abusive avoidance.
• Public trust and perception: If taxpayers believe the system is unfair or that others evade with impunity, compliance may suffer.
Legal Consequences & Penalties
• Civil / administrative fines: For errors, omissions, late filings, etc. The Maltese law provides for fines ranging from small amounts to larger ones, depending on severity.
• Additional tax charges: The tax authorities can demand payment of the under-claimed tax, interest, and often penalties or “additional tax” charges. In some cases under evasion, these may be multiplied (e.g. double or treble the amount undercharged).
• Criminal sanctions: In cases of fraud, falsification, serious misconduct, imprisonment can apply under Maltese law.
Why It Matters
• Ensures fairness: Everyone paying their fair share helps trust in the system and allows for public services to be funded.
• Revenue protection: Prevents loss of tax income that would otherwise affect the national budget.
• International obligations: EU membership, treaties, transparency rules mean Malta must align with standards to avoid reputational damage, fine(s), or being blacklisted etc.
• Attractiveness: Malta wants to remain an attractive jurisdiction for investment, but abuses can lead to intergovernmental pressure and loss of credibility.