Income Tax Consolidation was introduced in Malta by way of Legal Notice 110 of 2019, applicable for financial years commencing 2019 (Year of Assessment 2020).
The Formation of a Fiscal Unit
The Consolidation Group (Income Tax) Rules (S.L. 123.189) provide the possibility for a group of companies (as defined) to elect to compute their chargeable income or losses on a collective basis. The term “company” in this context does not include foundations (which elected to be treated as trusts in terms of Rule 4 of the Foundations (Income Tax) Rules), securitisation vehicles or finance leasing companies.
A parent company may elect for itself and a subsidiary to form a Fiscal Unit provided that both companies have the same accounting year end and meet any two of the following criteria, whereby the parent company:
- holds 95% of the voting rights;
- is entitled to 95% of profits available for distribution;
- is entitled to 95% of assets upon winding up.
These rules differ from the VAT Grouping Rules, in that they have a wider scope of application and are not limited to licensed industries.
Upon election, each eligible subsidiaries will form part of the same fiscal unit of the parent company and will be referred to thereafter as “transparent entities”. The Principal Taxpayer will be the company which assumes the rights, duties and obligations under the Income Tax Act relative to entities forming part of its fiscal unit and cannot be a transparent subsidiary. No company shall form part of more than one Fiscal Unit.
Chargeable Income of a Fiscal Unit
While the nature and sources of the income remains unchanged, in calculating the chargeable income of a Fiscal Unit, the following should be considered:
- Any income and gains earned by transparent entities is directly allocated to the principal taxpayer.
- All transactions between members of the same fiscal unit are ignored (apart from transfers of immovable property situated in Malta and transfers of shares in property companies).
- Any balances carried forward (such as unabsorbed losses, capital allowances and tax credits) are taken over by the principal taxpayer.
- Tax accounting balances other than that of the Untaxed Account are treated as balances of the principal taxpayer.
- Any foreign income tax suffered by a member of the fiscal unit shall be considered as suffered by the principal taxpayer and double taxation relief may be applied in accordance with the provisions of the Income Tax Act.
It should also be noted that under these regulations, when the shareholder of a company in a fiscal unit would have been entitled to tax refunds upon distribution of dividend and is empowered to consolidate, the whole fiscal unit shall be subject to a lower tax rate which by and large results in a similar tax efficient result.
The most prominent anti-abuse measure introduced entails that when the tax payable by a principal taxpayer is lower than 95% of the aggregate tax that would have been payable by all individual members as standalone companies, the difference constitutes deemed “advance” to the shareholders taxable at 35%.
The Income Tax consolidation regime is optional. Should a fiscal unit be established, the primary taxpayer would require a consolidated audited balance sheet and profit and loss account covering all the companies forming part of the fiscal unit. The principal taxpayer is responsible to file in a single income tax return covering all members, who are in turn exempted from the need to file individual income tax returns. All members are jointly and severally liable for the payment of any tax, additional tax or interest.
A company may exit the fiscal unit in the event that it does not remain a 95% subsidiary or it no longer has the same accounting period as the principal taxpayer. To date, regulations paving the way for a voluntary exit by companies forming part of a fiscal unit have not been prescribed.
How can we help?
We invite you to reach out to your RSM contacts or one of the contacts hereunder should you wish to discuss the applicability of these regulations or the impact that they could have in the context of your group structure. We would be pleased to help you identify potential opportunities therefrom.
Karen Spiteri Bailey - Partner
Jana Farrugia – Senior Manager