Introduction

In 2017, the International Financial Reporting Standard 17 (IFRS 17) was introduced, replacing IFRS 4. IFRS 17, titled “Insurance Contracts,” establishes comprehensive principles for recognizing, measuring, presenting, and disclosing insurance contracts. It applies to annual reporting periods beginning on or after January 1, 2023. The standard aims to provide more relevant and faithful information to assess the impact of insurance contracts on an entity’s financial position, performance, and cash flows.

Legal Framework for IFRS 17 Adoption

Under Article 2(1) of the Accountancy Profession Act, public interest entities are required to prepare their financial statements using IFRS as adopted by the EU. Consequently, insurance companies regulated by the Insurance Business Act must adopt IFRS 17 for financial periods beginning on or after January 1, 2023.

Tax Implications of IFRS 17 Adoption

The adoption of IFRS 17 has significant tax implications for insurance companies. Stakeholder consultations have highlighted the impact of this new standard on the taxation of insurance businesses, both in terms of transition and ongoing tax calculations. To address these implications, new rules will be introduced under Article 27(8) of the Income Tax Act to govern the computation of total income for insurance businesses applying IFRS 17. These rules will also guide the treatment of transitional gains or losses, which may arise from changes in the recognition of profits under IFRS 17 as compared to the previous IFRS 4 standard.

Transitional Impact and Staggering of Tax Payments

Upon the adoption of IFRS 17, insurance businesses may experience a one-time transitional impact, leading to significant gains or losses in the first year of implementation. To mitigate the immediate tax burden, Malta has introduced provisions allowing the tax on adoption gains to be deferred. Specifically, insurers may elect to spread the tax payable on gains arising from the adoption of IFRS 17 over a maximum period of five years, beginning from the year immediately following the first accounting period in which IFRS 17 is applied.

Eligibility for Election

To qualify for the election, the insurer must:

  • Be fully compliant with all tax obligations at the time of filing.
  • Have no outstanding balances or pending submissions under the Income Tax Acts, the Value Added Tax Act, or the Final Settlement System Rules.

The deadline for submitting the election for the Year of Assessment 2024 is November 15, 2024.

Payment of Tax on Adoption Gains

If an insurer elects to stagger the tax payments, they must make the annual installment payments by December 21st of each year. For the Year of Assessment 2024, the first installment is due by December 21, 2024.

For companies with tax settlement dates specified under Rule 5(b)(iii) of the Income Tax (Statutory Dates) Rules (S.L. 372.16), the first installment for Year of Assessment 2024 will be due by June 30, 2025, with the second installment due by December 21, 2025.

It is essential to note that this deferral applies solely to tax on adoption gains. The standard tax settlement dates for the chargeable income of insurance companies remain unchanged.

Further Guidance

Further guidance on the taxation of insurance businesses following the implementation of IFRS 17 will be issued in due course.

 

For more information, please contact on tax@gcsmalta.com