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Income Tax Consolidation in Malta

7th October 2024

Antoinette Scerri, Stephanie Bianco, and Benjamin Zammit McKeon

Author:

7th October 2024

Through the enactment of Subsidiary Legislation 123.189, Consolidated Group (Income Tax) Rules introduced in domestic tax legislation, a number of companies forming part of the same group are now allowed to prepare one income tax return instead of each company preparing its own separate income tax return.


๐–๐ก๐จ ๐œ๐š๐ง ๐ฃ๐จ๐ข๐ง ๐š ๐Ÿ๐ข๐ฌ๐œ๐š๐ฅ ๐ฎ๐ง๐ข๐ญ?

A group of companies which opt to prepare only one tax return (i.e. electing to be taxed as one single taxpayer) is referred to as a fiscal unit and in order to join a fiscal unit, companies must:

- Not have any balances due or outstanding filings with respect to the Income Tax Act (โ€˜ITAโ€™), Value Added Tax Act (โ€˜VATโ€™) and the Final Settlement System Rules (โ€˜FSSโ€™);

- A fiscal unit may be formed between a parent company and its subsidiaries as long as it owns at least 95% of any two of (i) the right to vote, (ii) the right to dividend and (iii) the right over assets upon winding up in the subsidiary;

- All companies within a fiscal unit must have their accounting period commencing and ending on the same dates;

- No company shall form part of more than one fiscal unit;

- Where a parent company holds less than a one hundred percent (100%) shareholding in the subsidiary, approval from the minority shareholder/s would need to be obtained for the subsidiary to join the fiscal unit, and thus become transparent.


These rules are not compulsory, and each company may opt to join a fiscal unit or to remain as a stand-alone entity even though it forms part of a group which has joined a fiscal unit. Once a company opts to join a fiscal unit, it will not be required to do a separate income tax return in terms of the ITA, however its obligations under VAT and FSS will not be affected.



๐Ž๐›๐ฅ๐ข๐ ๐š๐ญ๐ข๐จ๐ง๐ฌ ๐จ๐Ÿ ๐š ๐Ÿ๐ข๐ฌ๐œ๐š๐ฅ ๐ฎ๐ง๐ข๐ญ

Once a fiscal unit is set-up and registered, the parent or holding company will be considered as the โ€˜principal taxpayerโ€™ of such fiscal unit, and it will be the one responsible for submitting the consolidated income tax return. Thus, the chargeable income of all the companies forming part of the fiscal unit for that fiscal year shall be computed as if the income was derived by the principal taxpayer and shall be charged to tax in the name of the principal taxpayer at the applicable rates. It is important to note that:

i. All transactions carried out between two or more companies forming part of a fiscal unit during a fiscal year should be disregarded as if they never occurred, excluding transfers of immoveable property or transfer of shares in companies holding immoveable property;

ii. Dividends distributed by a company forming part of the fiscal unit to its parent company out of taxed profits that were derived before joining of the fiscal unit shall not be ignored and shall be considered as dividend income of the principal taxpayer;

iii. Income derived by companies forming part of the fiscal unit and considered as the income of the principal taxpayer shall retain the same character and shall be deemed to be derived from the same source and allocated to the same tax account as if the income was derived by the subsidiary company;

iv. Any assets on which the companies would have been allowed to claim capital allowances shall be deemed to be owned by the principal taxpayer and capital allowances claimed accordingly.



In order to prepare a consolidated income tax return, the principal taxpayer is required to prepare a consolidated balance sheet and income statement covering all the companies within the fiscal unit for a particular fiscal year.

Where a fiscal unit has been formed, the principal taxpayer and its 100% subsidiaries forming part of the fiscal unit shall be jointly and severally liable for the payment of tax, additional tax and interest due by the fiscal unit. For subsidiaries forming part of a fiscal unit but where the principal taxpayer holds less than 100% shareholding (but not less than 95%), tax due by the fiscal unit or part thereof may be apportioned to the subsidiary in accordance to an agreement entered into between the principal taxpayer and the other shareholders of the subsidiary which is not fully owned by the principal taxpayer.

In the event that a company elects to leave a fiscal unit of which it forms part, income tax liabilities of the group should be settled before the company may leave the fiscal unit. If the company is required to leave the fiscal unit because it no longer satisfies the criteria to be able to form part of the group (ex. change in its year-end or change in ownership) the settlement of the income tax liability of the fiscal unit shall not be required before such change. In case that the principal taxpayer is the company exiting the group, the fiscal unit shall be deemed to cease to exist with effect from the start of the basis year in which the principal taxpayer exits.



๐“๐ก๐ž ๐›๐ž๐ง๐ž๐Ÿ๐ข๐ญ๐ฌ ๐จ๐Ÿ ๐Ÿ๐จ๐ซ๐ฆ๐ข๐ง๐  ๐š ๐Ÿ๐ข๐ฌ๐œ๐š๐ฅ ๐ฎ๐ง๐ข๐ญ

The benefits outlined below may apply to a fiscal unit, depending on the structure and business activities of the group of companies:

- The number of tax returns to be filed by the group companies with the Malta Tax and Customs Administration will be less and hence the administrative burden associated with it will be reduced.

- The group of companies within the fiscal unit may obtain an advantage on the cashflow of the group due to the synergies which can be obtained. Tax refunds and payables would be indirectly set-off during the fiscal unit, instead of waiting for the separate tax compliance process of each group company.

- Additionally, certain tax compliance options may be directly availed of by the fiscal unit, as opposed to a more cumbersome process if the group would not be registered as a fiscal unit. The main benefit relates to any group losses which can be used directly by the principal taxpayer instead of applying other provisions of the ITA.


๐‡๐จ๐ฐ ๐œ๐š๐ง ๐ฐ๐ž ๐ก๐ž๐ฅ๐ฉ?

Radix can help you assess the applicability of the Income Tax consolidation rules and the fiscal unity for your group of companies and determine what benefits can the group have from a fiscal unit rather than keeping the companies separate. We can also assist the group in any tax compliance requirements required by the rules.

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