Introduction
The Subsidiary Legislation 123.189 Consolidated Group (Income Tax) Rules introduce a framework for companies in Malta to be treated as a single taxpayer entity. This legislation, effective from the financial year starting January 1, 2019, aims to streamline tax administration and provide potential tax benefits for corporate groups.
Purpose and Scope
The primary purpose of these rules is to allow corporate groups to consolidate their tax reporting and liabilities, thereby simplifying tax compliance. By allowing companies within a group to be treated as one taxpayer, the legislation facilitates more efficient tax management and potential reductions in the overall tax burden.
Key Definitions
Company: Defined broadly to include entities subject to income tax, certain trusts, and foundations. However, it excludes foundations making specific elections, securitisation vehicles, and finance leasing companies.
Parent Company: A company holding at least 95% of voting rights, profits, and assets in a subsidiary.
Transparent Subsidiary: A subsidiary that meets the 95% ownership threshold by the parent company.
Principal Taxpayer: The ultimate parent company, registered in Malta, responsible for the consolidated tax liabilities of the group.
Formation of a Fiscal Unit
A fiscal unit is formed through an election by the parent company, applicable to both Maltese-resident and non-resident companies. Key points include:
- Approval from Minority Shareholders: Required if the subsidiary is not 100% owned.
- Effective Date: From the year of assessment in which the election is made unless specified otherwise.
- Notification: Must be given to the Commissioner of Inland Revenue.
Can foreign entities that are neither incorporated nor resident in Malta be part of a fiscal Unit?
The principal taxpayer shall always be “a company registered in Malta” in terms of the Income Tax Act.
“a company registered in Malta” shall mean:
- a company which is resident in Malta or
- a company which, although not resident in Malta, carries on any activity in Malta; and
- in the case of a company which is neither incorporated nor resident in Malta shall mean a company that is registered for this purpose with the Commissioner in such manner as may be prescribed.
Therefore yes, a fiscal unit can be formed, having the principal taxpayer as a foreign (non-Maltese) entity as long as the entity is registered with the Commissioner.
Treatment of Tax Balances
Upon the formation of a fiscal unit, tax balances such as trading losses and capital allowances of a 95% subsidiary are transferred to the principal taxpayer. These balances remain available to the principal taxpayer until utilized or until the subsidiary exits the fiscal unit.
Exiting a Fiscal Unit
A subsidiary exits a fiscal unit if it no longer meets the 95% ownership requirement or changes its accounting period. Upon exit:
- Adjustment of Tax Balances: Balances and asset costs are reallocated appropriately.
- Tax Liabilities: The exiting subsidiary assumes responsibility for its own tax liabilities moving forward.
Calculation of Chargeable Income
Income and expenses of the fiscal unit are consolidated and treated as derived or incurred by the principal taxpayer. Specific considerations include:
- Intra-Group Transactions: Generally ignored, except where specified.
- Non-Resident Subsidiaries: Income is attributed to a permanent establishment of the principal taxpayer in Malta, and not taxable in Malta.
Tax Chargeability
The rules provide for a reduced tax rate for the fiscal unit, potentially lowering the effective tax rate to 5% for shareholders registered for refund purposes. This is achieved without dividend distributions, offering significant tax planning advantages.
Where a shareholder is registered for Maltese income tax refund purposes, tax is applied at a rate of 35% less the amount of refund which members of the fiscal unit would be entitled to claim in the event that a distribution of profits was made to them
Generally, the effective tax rate will be 5% of the consolidated chargeable income. However, in certain cases, when a member of the fiscal unit receives passive income, such income has a direct effect on the effective tax rate because the tax refund that would have been applied for on passive income is different from the tax refund for taxes on trading income.
Anti-Abuse Measures
To prevent tax avoidance, the rules stipulate that the tax payable by the fiscal unit must not be less than 95% of the aggregate tax payable by the companies individually if they were not consolidated.
Benefits of Tax Consolidation
Tax consolidation under these rules offers several benefits:
- Simplified Tax Administration: Consolidates reporting and compliance efforts.
- Potential Tax Savings: Through reduced tax rates and efficient utilization of tax balances.
- Enhanced Cash Flow: By deferring tax payments through intra-group financing arrangements.
