Following the publication of the Consolidated Group (Income Tax) Rules by means of Legal Notice 110 of 2019, Malta introduced fiscal unity rules providing for a consolidated tax group. As a result, certain groups of companies may, from the year of assessment 2020 (basis year 2019), opt to be treated as one single taxpayer.
Unlike the group relief provisions already contained in the Income Tax Act which provide for the surrendering of tax losses to other members of the same group, the fiscal unity rules provide for a consolidated tax group.
Also, the definition of a group in these rules is different and much wider than the definition contained in the Income Tax Act allowing both Maltese companies as well as foreign entities that fall within the definition of a company to form part of the consolidated group. The foreign entities need not be tax resident in Malta to form part of the fiscal unit, but it is necessary that they are tax registered in Malta.
It is interesting to note that certain trust arrangements as well as certain foundations may also form part of the consolidated tax group. This will give flexibility to certain structures. On the other hand, the rules exclude certain types of foundations, securitisation vehicles and finance leasing companies.
Requirements for the Formation of a Fiscal Unit
A parent company, as the principal taxpayer, may make an election for itself and its one or more subsidiaries to form a fiscal unit provided that in the year prior to the year of assessment it holds at least 95% of two of the following rights in each subsidiary (hereinafter refer to as 95% subsidiary):
- voting rights;
- profits available for distribution; or
- assets available for distribution upon winding up.
Where the election is made, each 95% subsidiary will form part of the same fiscal unit of its parent company, with such subsidiaries being referred to as “transparent subsidiaries.” Where the transparent subsidiary is itself a parent company, its 95% subsidiaries will also join the fiscal unit. The principal taxpayer’s election becomes effective as from the year of assessment in which it is made, provided that it is made prior to tax return submission due date of the transparent subsidiaries.
Such an election is possible provided that the accounting periods of all the members within the fiscal unit are the same and subject to the consent of any minority shareholders. Naturally, no company shall form part of more than one fiscal unit at any one time.
Upon registering as a fiscal unit, the principal taxpayer assumes the rights, duties and obligations under the Income Tax Acts relative to the fiscal unit. The subsidiaries within the fiscal unit shall be deemed to be transparent entities for Malta income tax purposes. Balances of items allowed to be carried forward, tax credits, tax account balances (excluding the untaxed account) of the transparent subsidiaries at the end of the basis year preceding the year in which the election is made are considered to be balances of the principal taxpayer. Such carryforward is subject to the consent of the minority shareholders and if minority shareholders do not approve, then such balances will be suspended for as long as the transparent subsidiary remains part of the fiscal unit.
The Fiscal Unit’s Chargeable Income and Tax Payable
Intra-group transactions or transactions between members of the fiscal unit are referred to as “ignored transactions” and are disregarded for tax purposes. An exception relates to transfers of immovable property situated in Malta and transfers of property companies.
A property company is defined in the Income Tax Act as a company which owns immovable property situated in Malta or any real rights thereon or a company which holds, directly or indirectly, shares or other interests in any entity or person, which owns immovable property situated in Malta or any real rights thereon where 5% or more of the total value of the said shares or other interests so held is attributable to such immovable property or right.
Naturally, transfers of immovable property and property companies cannot be characterised as ignored transactions as otherwise such transfers would become exempt when transferred within a fiscal unit.
Given that the subsidiaries are deemed to be transparent subsidiaries, any income and gains which is not regarded as ignored transactions derived by such transparent subsidiaries, is directly allocated to the principal taxpayer.
Income or gains allocated to the principal taxpayer retain their character and source. The rules however contemplate a number of deemed source rules. For example, income or gains derived by a non-Malta tax resident transparent subsidiary is deemed to be attributable to a permanent establishment of the principal taxpayer situated outside Malta insofar as the transparent subsidiary maintains sufficient substance therein.
Similarly, expenditure and capital allowances incurred by transparent subsidiaries and which is not regarded as an ignored transaction, is directly allocated to the principal taxpayer or the parent company.
This tax consolidation provides for a full integration of the tax position of its members and hence is different in scope than the group relief provisions referred to above.
Furthermore, any foreign income tax suffered by a company forming part of the fiscal unit is deemed to have been incurred by the principal taxpayer, and relief from double taxation in accordance with the Income Tax Act is allowed accordingly.
The main advantage of the tax consolidation or the fiscal unity is that a group may achieve the same effective tax rate without the need for the distributing company or transparent subsidiary to pay the relevant tax and also avoid the need to make claims and await the receipt of the refunds.
The tax consolidation regime is optional, but should a fiscal unit be formed, the principal taxpayer is required to prepare, on a yearly basis, a consolidated balance sheet and consolidated profit and loss account covering all companies within the fiscal unit accompanied by an audit report. Given the criteria described above to form a fiscal unit, the companies included in the consolidated accounts for the tax consolidation regime may differ from thse included in the consolidated accounts as required in terms of the Companies Act.
The principal taxpayer is responsible for filing the tax return/declaration of the fiscal unit, with other members of the fiscal unit being exempted from filing their respective tax returns. However, members of the fiscal unit are jointly and severally liable for the payment of tax, additional tax and interest. The tax liability by the fiscal unit may be apportioned between the principal taxpayer and the transparent subsidiaries.
These tax consolidation rules provide for an anti-abuse rule where the tax payable by the principal taxpayer cannot be lower than 95% of the aggregate tax that would have been payable by the companies within the fiscal unit had an election under these rules was not applied for.
Benefits of Tax Consolidation
As highlighted earlier on, the main benefit of the tax consolidation or fiscal unity is the cash flow advantage especially when compared to the current operation of the partial shareholder tax refunds upon a distribution of taxed profits. The new tax consolidation rules reduce the tax due to the combined overall effective tax rate without the need to wait for the income tax refund on distributed taxed profits. However, the tax consolidation may also be useful within a local context since it is wider in scope than the surrendering of tax trading losses. Clearly in view of the embedded anti-abuse provision, the purpose of these rules is not to provide a tax advantage.
It is evident that the tax consolidation rules will bring further compliance obligations, particularly the need to prepare and submit consolidated financial statements. Additionally, tax computations will still be required for each company and also for the fiscal unit as a whole in order to compare the tax liabilities and satisfy the anti-abuse provision. On the other hand, there is less compliance with respect to the filing of the income tax returns or declarations as only one return or declaration is submitted by the principal taxpayer.
The Notional Interest Deduction (NID) has already eased the number of tax refund claims filed by shareholders upon a receipt of taxed dividends but we expect that these rules will be availed of by large groups. The introduction of tax consolidation rules is long-awaited and is welcome as it brings Malta at level with other financial centers.