Introduction to the Rules
The Tax Consolidation Rules in Malta have been recently introduced via Legal Notice 110 of 2019, Subsidiary Legislation 123.189.
The Rules aim to simplify the tax compliance obligations of companies forming part of a Group (as defined under the rules), whilst arriving at the same tax charge for the Group as a whole. These rules introduce the formation of a tax Group in Malta.
For the purposes of the Rules, the Parent Company of the Group (the Principal Taxpayer) must hold in its subsidiaries at least 95% of either:
- Voting Rights
- Profits Available for Distribution
- Assets Available for Distribution upon Winding Up
The subsidiaries forming part of the Group (Fiscal Unit) would be considered as transparent for tax purposes.
Forming part of a Group and the application of these rules is optional and the choice to form a Fiscal Unit is to be made via an election made at the level of the parent company (holding 95% shareholding in its subsidiary), but must regardless be subject to the consent of the minority shareholders, if applicable.
The Rules in Practice
The Main outcome of the application of the Rules is the fact that intra-group transactions are ignored for tax purposes, and thus not included in the tax computation of the group, except for transfers related to Immovable Property situated in Malta. Based on the fact that it generally takes months for a shareholder to receive a refund, the main aim of these Rules is to provide a cash flow advantage in the instance where shareholder refunds may be claimed by non-resident shareholders. This is achieved by having the tax computation factor into the possibility of a refund and arriving at the net effective tax without having to claim the refund.
The Rules also have an affect on the Notional Interest Deduction (NID), whereby the application of the NID must be taken for the group as a whole, including the fact that the Risk Capital of the Group would be aggregated, whilst eliminating any intra-group debt.
With respect to Groups wholly owned by Maltese Resident shareholders, and thus with no tax refund availability, the rules are nonetheless beneficial in that they simplify the tax obligations without having to claim the imputation credits.
The Rules naturally include a number of obligations which need to be adhered to in order for a Group to be able to apply the said Rules. For example, the Principal Taxpayer shall be responsible for the payment of the tax and for the submission of the annual tax return. Furthermore, the Principal Taxpayer will be required to prepare an audited consolidated balance sheet and consolidated profit and loss account covering all the companies in the Fiscal Unit. On the other hand, the transparent subsidiaries will be exempt from preparing audited financial statements. It is important to note however that every entity forming part of the Fiscal Unit shall be jointly and severally liable for the payment of the tax.
Whilst the Rules seem to be providing a practical solution for the current cash flow disadvantage in claiming tax refunds, it is important to ensure that the benefits outweigh the costs applicable to create a Fiscal Unit. Furthermore, several aspects in the Rules are open to diverging interpretations and thus the Revenue may be issuing guidelines some time in the future for a better application of these Rules.