Consolidated income tax returns
Malta introduced the concept of a consolidated income tax return for related entities into Maltese tax law through the Consolidated Group rules. The rules are intended to simplify the income tax calculations and tax reporting for groups of companies, and are applicable for financial periods commencing on or after 1 January 2019.
The election to form part of a consolidated group of companies (hereinafter referred to as the “fiscal unit”) is optional, and if the companies are eligible, it will become effective from the year of assessment in which it is made.
The rules define the term ‘principal taxpayer’, which is the reporting entity for the group as the parent company, which must be a company registered in Malta and which holds shares in another company which constitute 95% or more (to the extent of any two of the below listed conditions), namely :
- Voting rights in the transparent subsidiary,
- Rights to profits available for distribution,
- Rights to any assets available for distribution on winding up.
The fiscal unit consists of a principal taxpayer and all its direct and indirect subsidiaries, (hereinafter referred to as the “transparent subsidiaries”). For a group of companies to be eligible to apply under these rules, all companies within the fiscal unit must have the same accounting period end.
Where the subsidiary is 95% owned by the principal taxpayer, the election will be subject to the approval of the minority shareholders of the transparent subsidiary. A company will not be allowed to form part of more than one fiscal unit at any time.
Once the fiscal unit is registered as such, the principal taxpayer will assume the rights, duties and obligations under the Income Tax Act relative to that fiscal unit. Further to this, during the period of the fiscal unit’s existence the rights, duties and obligations of the transparent subsidiaries will be suspended.
Joining and leaving a fiscal unit
Once a transparent subsidiary decides to join a fiscal unit, any previous balances, tax credits allowed to be carried forward, and balances of any profits will be considered to be balances of the principal taxpayer. However, any balances which must be retained by the transparent subsidiary will be disregarded and not taken into account in computing the tax charge of the principal taxpayer, and will be available again to the transparent subsidiary once it no longer forms part of the fiscal unit.
Where any of the transparent subsidiaries no longer satisfies the prescribed conditions, it will be deemed to no longer be part of the fiscal unit with effect from the basis year in which it ceased to satisfy those conditions.
Further to the above, any balances of trading loss, unabsorbed deductions, other losses and allowances, and profits will continue to be deemed as balances of the principal company. An exception from the above is unabsorbed deductions resulting from assets owned by the transparent subsidiary leaving the fiscal unit. Where a deduction on the relevant assets was claimed by the principal taxpayer, or any other transparent subsidiary forming part of the fiscal unit, the transparent subsidiary leaving the unit will be entitled to continue claiming a deduction in respect of those assets. A balancing statement will be required to be prepared.
The chargeable income of all transparent subsidiaries will be deemed to be derived by the principal taxpayer, and will be subject to tax at the applicable tax rate. This also applies to expenditure and capital allowances incurred by the transparent subsidiaries.
The Rules provide that, where the principal taxpayer is a person who is not ordinarily resident in Malta or not domiciled in Malta, the following income or gains shall be attributed to the principal taxpayer:
- All the income and gains derived by any transparent subsidiary resident in Malta, which income and gains shall be deemed to arise in Malta,
- All the income or gains derived in Malta by a transparent subsidiary resident in Malta,
- All income and gains derived outside Malta by a transparent subsidiary not resident in Malta, but which are received in Malta.
Any income or gains derived by a foreign transparent subsidiary will be deemed to be attributable to a permanent establishment of the principal taxpayer.
With the exception of certain transactions (such as transactions involving immovable property situated in Malta), transactions between members of the fiscal unit will be ignored. However, dividend income received by the parent company distributed out of taxed profits derived by the transparent subsidiary prior to joining the fiscal unit will not be ignored, and will be deemed to be dividend income derived by the principal taxpayer.
In the case of the shareholders of the principal entity, or if the fiscal unit comprises shareholders entitled to tax refunds in terms of the Income Tax Management Act, rather than paying tax and claiming a tax refund, the tax refund is taken into account in determining the applicable tax rate of the fiscal unit by deducting it from the tax rate applicable to the chargeable income of the fiscal unit. This achieves the same effective tax rate, but avoids the payment of tax and subsequent claim for a tax refund.
Moreover, the principal taxpayer may make payments to its subsidiaries for any allowance, deduction or loss that is transferred to the principal taxpayer. Such payments will be disregarded for tax purposes in the hands of the subsidiaries, and will not be allowed as a deduction at the level of the principal taxpayer.
Any income derived by a transparent subsidiary which suffers tax overseas will be deemed to be the principal taxpayer’s income, and for this reason, the principal taxpayer will have the right to claim relief from double taxation.
The principal taxpayer has the obligation to prepare a consolidated profit and loss account and balance sheet for all companies in the fiscal unit for each fiscal year. The obligation to file a tax return for the fiscal unit stays with the principal taxpayer, and all subsidiaries will be exempt from filing their own tax returns. However, the principal taxpayer and its wholly owned subsidiaries will be jointly and severally liable for the payment of tax, additional tax and interest due by the fiscal unit.