By Legal Notice of 31 May 2019 – “Consolidated Group (Income Tax) Rules” (the Rules) fiscal unity has been introduced in Malta.
The Rules provide taxpayers with an option to create a consolidated group for income tax purposes. Unlike the VAT grouping rules, the income tax rules are applicable to all taxpayers, irrespective of the sector they operate in.
Creation of a fiscal unit
A fiscal unit may consist of Maltese or foreign companies. The parent company (the principal taxpayer) should, at all times, be a company registered in Malta and hold at least 95% or more of any two of the following three rights:
- voting rights;
- right to profits; and
- right to assets available upon a winding up.
It is worth noting that under certain conditions trust and foundations too may be considered as companies for the purpose of the Rules.
Furthermore, all companies within a group should have the same accounting year for the entire duration of the group’s existence. In case of less than 100% shareholding, a minority shareholder’s approval is required for a subsidiary to join the unit. A subsidiary is referred to as ‘transparent subsidiary’. Indirect subsidiaries of the principal taxpayers may also form part of the group as long as the conditions mentioned above are met.
The rights, duties and obligations under the Income
Tax Act of the transparent subsidiaries are suspended and are instead assumed
by the principal taxpayer, who for instance, is liable for filing the tax
return covering all companies in the group.
A consolidated Balance Sheet and Profit and Loss Account of the fiscal unit should be prepared and audited on an annual basis. However, there is no obligation to file the financial statements with the authorities.
The principal taxpayer is responsible for paying tax for the unit. Only when the transparent subsidiaries are 100% owned by the principal taxpayer, are all the companies jointly and severally liable to the payment of tax.
Benefits of a fiscal unit
The chargeable income of the unit should be computed as if it were derived by the principal taxpayer. All income derived and expenses incurred by companies forming part of the fiscal unit shall be deemed to be respectively derived or incurred by the principal taxpayer. Similarly, any foreign income tax incurred by a company within the fiscal unit, should be deemed to have been incurred by the principal taxpayer. While calculating the income tax due by the fiscal unit, intragroup transactions (except for transfers of immovable property located in Malta and transfers of property companies) are disregarded for tax purposes. Moreover, double taxation relief is still applicable in accordance with the Income Tax Act provisions.
The Rules allow for any refund due under the Income
Tax Management Act to
a shareholder of a company forming part of a fiscal unit to be taken into account in determining the applicable tax rate of the fiscal unit. Hence, the lower effective tax rate may be immediately realised which does away with delays resulting from the refund application.
The Rules contain detailed anti-abuse provisions and apply with effect from financial periods starting on or after 1 January 2019.