Malta has on the 31st May 2019, by means of Legal Notice 110 of 2019, introduced rules by virtue of which a parent company and its subsidiaries may elect to form one fiscal unit. The Rules shall enter into force as from year of assessment 2020. Unlike the vat grouping rules which are only applicable to the gaming and banking industries, the scope of the income tax grouping rules are much wider and are not limited to any particular industry.
Forming a fiscal unit
A parent company may elect to form a fiscal unit which will be comprised of itself and its subsidiaries, provided that all companies will have the same accounting year end. For all companies to form part of the same fiscal unit, the parent company must be a company holding shares in the subsidiaries and satisfying any two of the following conditions:
- The parent company must hold at least 95% of the voting rights in the subsidiary companies;
- The parent company must be beneficially entitled to at least 95% of any profits available for distribution to the ordinary shareholders of the subsidiary companies;
- The parent company must be beneficially entitled to at least 95% of any assets of the subsidiary companies available for distribution to its ordinary shareholders on a winding up.
If such an election is made, each 95% subsidiary will form part of the same fiscal unit of its parent company. The subsidiaries will be referred to as ‘transparent subsidiaries.’ Where the transparent subsidiary is itself a parent company, its 95% subsidiaries shall also join the fiscal unit.
The principal taxpayer of a fiscal unit shall be a company within the same fiscal unit which is not a transparent subsidiary and is the parent company of one or more transparent subsidiaries. The principal taxpayer shall assume the rights, duties and obligations under the ITAs relative to that fiscal unit, while all the rights duties and obligations of the other members of the fiscal unit will be suspended.
Companies forming part of the fiscal unit must at all times be companies registered in Malta, meaning that companies which are not resident in Malta may also form part of a fiscal unit. Companies registered in Malta include non-resident companies that carry on any activity in Malta.
No company shall form part of one fiscal unit at any one time.
Calculation of the chargeable income of a fiscal unit
In view of the fact all the members of the fiscal unit (with the exception of the principal taxpayer), shall be transparent entities for Malta income tax purposes, any income and gains derived by such transparent subsidiaries shall be directly allocated to the principal taxpayer. Similarly, expenditure and capital allowances incurred by the transparent subsidiaries will be directly allocated to the principal taxpayer.
Any unabsorbed losses and capital allowances and unutilized tax credits of the subsidiary companies will be taken over by the principal taxpayer. The same shall apply to the balance of any profits allocated to the tax accounts of the subsidiary companies, with the exception of the untaxed account. Where the subsidiary company is not a 100% subsidiary of the parent company, the above requires the approval of the equity shareholders which are not directly or indirectly owned by the parent company.
Transactions between members of the fiscal unit shall be disregarded, with the exception of transfers of immovable property situated in Malta, and transfers of shares in property companies. Furthermore dividends paid by a transparent subsidiary to its parent company out of taxed profits which were derived prior to the formation of the fiscal unit will not be ignored and these shall be deemed to be dividends derived by the principal tax payer.
Income or gains allocated to the principal taxpayer shall retain their character and source. Furthermore, any foreign income tax suffered by a company forming part of the fiscal unit, shall be deemed to have been incurred by the principal taxpayer, and relief from double taxation in accordance with the Income Tax Act shall be allowed to the principal taxpayer accordingly.
Compliance obligations of a fiscal unit
The principal taxpayer shall, for each year, be required to prepare a consolidated balance sheet and consolidated profit and loss account for all companies within the fiscal unit, which must be audited by a Certified Public Auditor. The principal taxpayer shall also be responsible for filing the tax return of the fiscal unit, while the other members of the fiscal unit will be exempted from preparing audited financial statements and from filing their respective tax returns.
The Members of the fiscal unit shall be jointly and severally liable for the payment of tax, additional tax and interest due by the fiscal unit. The rules provide for apportionment mechanisms to take into account instances where the transparent subsidiary will not be wholly owned by the principal taxpayer or by a parent company.
The principal taxpayer shall be required to allocate the profits attributable to it to the same tax accounts as though it had derived these profits directly.
A transparent subsidiary of a fiscal unit shall exit the said unit if the 95% threshold is no longer met and if it no longer has the same accounting period as the principal taxpayer. The conditions by virtue of which an election to form a fiscal unit may be voluntary revoked are still to be prescribed.
The rules finally contain a number of anti-abuse measures, by virtue of which the Commissioner for Revenue may nullify any undue advantage or benefit obtained by any person which is not reconcilable with the objective of these rules.