Malta: Consolidated Group Fiscal Unity Rules

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The Consolidated Group (Income Tax) Rules, 2019 are fiscal unity rules. These rules came into force with effect from year of assessment 2020 in relation to Fiscal Units having accounting periods commencing in calendar year 2019 and subsequent years.

These rules apply to companies as well as to Foundations and Trusts that opt to be treated as companies. A parent company may make an election in order to form a Fiscal Unit with its subsidiary. For this to be possible the parent needs to hold at least 95% of any two of the voting, profits and winding down rights. It is necessary for such a subsidiary to have its accounting period beginning and ending on the same dates as the accounting period of the parent company in all the years in which it forms part of the fiscal unit. The rules in the Income Tax Act relating to the incorporation and winding down of group companies apply in this context. Such a subsidiary is referred to as a Transparent Subsidiary for tax purposes.

A fiscal unit needs to be registered and the applicant parent company would then be considered to be the Principle Taxpayer. The legal effect of a fiscal unit is that the principle taxpayer shall assume the rights, duties and obligations under the Income Tax Acts relative to all the companies included in the resultant fiscal unit. No company can form part of more than one fiscal unit. Should a transparent subsidiary be itself the principle taxpayer of another fiscal unit then all the companies in the existing and new fiscal unit shall form part of the new fiscal unit.

An election is required to be made in the year of assessment to which it applies and prior to the tax filing deadlines. An election may also be revoked by the principle taxpayer in later years.

Taxation:

The balance of any item of the transparent subsidiary allowed to be carried forward under the ITA, or under any rules made thereunder or any other tax credits that may be carried forward in terms of any other law. or the balance of any profits allocated to the tax accounts, excluding the untaxed account, of the transparent subsidiary, shall be considered to be a balance of the principal taxpayer.

In any circumstance where balances are not considered to be a balance of the principle taxpayer, these shall be kept in abeyance. They shall not be taken into account for the purposes of the ITA for as long as the transparent subsidiary remains a member of the fiscal unit, after which time such balances shall once again become available to the subsidiary without reduction or limitation.

Intercompany transactions occurring between members of the fiscal group shall be considered as Ignored Transactions for the purposes of arriving at the chargeable income of the principle taxpayer. Distribution of dividends from retained earning existing prior to the entry into the fiscal group and transactions relating to shares in property companies shall not be considered as ignored transactions.

The income, expenses and taxable profit of all the companies members of a fiscal unit for a year of assessment shall be computed as if such income was derived and expenses incurred and profit earned by the principal taxpayer and it shall be chargeable to tax in the name of the principal taxpayer at the rate/s applicable thereto. More detailed rules apply in this area.

There are special rules that are applicable relating to properties.

Where the income or gains are derived by a transparent subsidiary that is not resident in Malta these rules shall apply to the income or gains of the permanent establishment of the non-resident subsidiary in Malta, Malta source income and remitted income as the case may be.

The principle taxpayer shall benefit under the Notional Interest Deductions rules on the values in its consolidated balance sheet and only to the extent that is related to the fiscal unit in Malta.

Detailed rules also apply to tax refunds that may be receivable by companies following the distribution of dividends within the fiscal unit.

Tax credits relating to foreign tax suffered by transparent subsidiaries would accrue to the principle taxpayer.

Rules previously applicable to the transparent subsidiaries, and their underlying transparent subsidiaries within a fiscal unit, in relation to profits attribution to the Tax Accounts shall apply in the same manner to the principle taxpayer.

The 15% final tax provisions relating to payment of investment income shall not apply when the recipient and the payor companies are members of the same fiscal unit.

Consolidated audited financial statements are to be prepared for principle taxpayer that include all the companies that are members of the fiscal unit.

The principle taxpayer shall be subject to self-assessment and the filing of a tax return. The transparent subsidiaries members of the fiscal unit shall, for as long as they are members of such a fiscal unit, be exempt from self-assessment and the filing of a tax return.

The principal taxpayer and 100% subsidiaries which are transparent subsidiaries shall be jointly and severally liable for the payment of tax, additional tax and interest due by the fiscal unit. The tax due by the fiscal unit may be apportioned between the principal taxpayer and its 100% subsidiaries which are transparent subsidiaries as the principal taxpayer may determine.

Impact on ultimate shareholders:

Where the tax payable by the principle taxpayer is lower than 95% of the aggregate of the tax that would have been payable by all the companies forming part of the fiscal unit on their chargeable income the election made for fiscal unity shall be deemed to have caused an advance to the shareholders of the principal taxpayer which cannot be set off and which is equal to the result of the difference between the tax payable by all fiscal unit companies and the tax payable by the principal taxpayer divided by the standard company rate of tax.

This advance shall be deemed to be a dividend distributed to the shareholders of the principal taxpayer on the tax return date following the end of the accounting year in which the shareholders are deemed to have received the advance. The deemed dividend shall be considered to be an untaxed dividend. It shall be incumbent on the principle taxpayer to pay a tax at source on this deemed dividend of 15% to the Commissioner for Revenue.

Leaving a fiscal unit:

A transparent subsidiary that for any reason is no longer a member of a fiscal unit is an Exiting Company.

A transparent subsidiary would be considered as no longer forming part of a fiscal unit, together with its own transparent subsidiaries, should it no longer have its accounting period beginning and ending on the same dates as its principal taxpayer. The exiting company may register to form its own fiscal unit with regard to its own transparent subsidiaries. An exiting company may become a transparent subsidiary of another already existing fiscal unit or of a newly registered fiscal unit under a new principle taxpayer.

A transparent subsidiary becomes an exiting company should its principle taxpayer elect to revoke its fiscal unity election.

The balance of any trading loss, losses claimed under the group relief provisions and any other loss, allowance or otherwise, the balance of any profits allocated to the tax accounts and unabsorbed deductions for wear and tear shall continue to pertain to the principal taxpayer of the fiscal unit for the purposes of the ITA. With regard to the unabsorbed deductions for wear and tear, there are exceptions in this regard for the cost of the assets owned by the exiting company and relevant deductions. Balancing statements may need to be prepared with regard to such latter assets.

Minority interests:

There may be cases where a principle taxpayer holds at least 95% of a transparent subsidiary but not 100%. In such situations there are a number of actions envisaged in the rules that would also require the approval of the minority shareholders.

Anti-tax avoidance rule:

Without prejudice to the provisions of article 51 of the ITA or any other general anti-avoidance rules under the ITAs, where in relation to a transaction, or to a series of transactions, the principal taxpayer, the shareholders thereof or the individual direct or indirect beneficial owners of the principal taxpayer, or any person which is controlled and beneficially owned directly or indirectly to the extent of more than fifty per cent (50%) by the same individuals, is in a position to obtain an undue advantage which has the effect of reducing their liability to tax in a manner which is not reconcilable with the object and purpose of this sub-rule, the Commissioner shall determine the relevant liability to tax in such manner and in such amount as may be necessary so as to nullify any such benefit or advantage.

 

This article is only intended to give a general overview of the legislation. Professional advice should be separately sought on the applicability of these rules to any actual company structure or situation.

Please contact David Marinelli, DM Europe, should you wish to discuss any matter relating to Companies registered in Malta.

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