Overview
The option of income tax consolidation in Malta was introduced by enacting Legal Notice 110 of 2019. The said Legal Notice brought into effect the Consolidated Group (Income Tax) Rules, 2019, as subsidiary legislation to the Maltese Income Tax Act, Chapter 123 of the Laws of Malta. This has been applicable from the year of assessment 2020 (for companies having accounting periods commencing in calendar year 2019).
The Legal Notice provides companies forming part of a group of companies (as defined) the opportunity to elect to be treated as one single taxpayer (subject to the satisfaction of certain statutory conditions). This would be achieved by allowing a parent company to elect that its subsidiary/ies and itself will form a fiscal unit, resulting in the subsidiary/ies being treated as transparent. In order to join or form part of a fiscal unit, a company should neither have any outstanding balances due nor any outstanding filings required in terms of the Income Tax Acts, the Value Added Tax Act and the Final Settlement System Rules.
As a result, upon successful registration, the parent company would be considered the ‘principal taxpayer’ of the fiscal unit, and the chargeable income of the members of the fiscal unit would be taxable solely in the hands of such principal taxpayer. Furthermore, transactions taking place between persons forming part of the fiscal unit (excluding transfers of immovable property situated in Malta subject to a final tax) are disregarded and fall outside the scope of Maltese income tax legislation.
The primary conditions to be satisfied for a successful registration are that:
the parent company holds at least a ninety-five percent (95%) shareholding in the subsidiary; and
the accounting period of the members joining the fiscal unit starts and ends on the same date.
The Legal Notice also establishes other requirements that will need to be satisfied to establish a fiscal unit.
No person may be a member of more than one fiscal unit at the same time. Moreover, where the principal taxpayer holds less than a one hundred percent (100%) shareholding in the subsidiary, approval from the minority shareholder/s would also need to be obtained for the subsidiary to join the fiscal unit, and thus become transparent.
Upon joining the fiscal unit, the balance of any (i) item allowed to be carried forward in terms of the Income Tax Act (such as unabsorbed capital allowances), and (ii) profits allocated to the tax accounts (excluding the untaxed account), are by default treated as a balance of the principal taxpayer.
Where one is not a hundred per cent (100%) subsidiary, one may opt out of such treatment in which case the said balances would be held in abeyance in the transparent subsidiary until such subsidiary leaves the fiscal unit.
In addition, the principal taxpayer assumes all the rights, duties, and obligations under the Income Tax Acts with respect to the subsidiaries forming part of the fiscal unit, save for those rights, duties, and obligations arising from the Final Settlement System Rules.
That said, each member of a fiscal unit shall be jointly and severally liable for the payment of any tax, administrative penalties and interest arising under the Income Tax Act, which become due and payable by the fiscal unit. Additional requirements exist in the case of subsidiaries which are not fully owned.
The fiscal unit is also required to prepare audited consolidated financial statements on an annual basis exclusively for those entities within the fiscal unit.
In calculating the chargeable income of the fiscal unit, the general rules with respect to deductibility of expenses must continue to be adhered to.
Furthermore, when calculating the tax liability of the fiscal unit, should the shareholder of the principal taxpayer be registered for Maltese income tax refund purposes, the Rules allow the fiscal unit to apply at its level a rate of income tax which, broadly, results from the offset of the refund due to the shareholders against the income tax due by the company, thus achieving a tax-efficient result without the need to distribute a dividend.
The Legal Notice also sets out the manner and procedure in which the membership in a fiscal unit may be terminated, e.g., where a member of the fiscal unit no longer satisfies the requisite conditions to form part of the fiscal unit.
You can access the guidelines related to the Legal Notice by clicking here.
How can we help?
We would be pleased to meet you to discuss these Rules in further detail and their applicability and possible opportunities in the context of your group entities.
If you would like to discuss income tax consolidation further, please reach out to any of your usual PwC contacts or one of the below contacts.
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