With the introduction of Legal Notice 110 of 2019, Malta introduced the Consolidated Group (Income Tax) Rules (“the Rules”). These Rules have made it possible for a group of companies to elect to be treated as one single taxpayer – a fiscal unit. The parent company would be the so-called principal taxpayer and the subsidiary/subsidiaries forming part of the fiscal unit would be treated as transparent for tax purposes. Naturally, this is subject to the satisfaction of certain conditions as specified in the Legal Notice. These conditions will be explained in part two of this mini-series publication on tax consolidation, so stay tuned!

1. Transfer of rights, duties and obligations under the ITA

Once a fiscal unit is registered, the principal taxpayer shall assume the rights, duties and obligations under the Income Tax Acts relative to that fiscal unit (other taxes such as indirect taxes will be responsibility of the standalone company).

2. Changes in the applicable tax rate(s)

In a normal scenario, the registered shareholder/s of a Malta company would only be able to claim a tax refund if the distributing Malta company distributes a dividend to its shareholder/s. The distributing company would pay tax on its chargeable income at the rate of 35%, subject to any relief and/or tax credits, with the shareholder/s being able to claim a tax refund on a portion of the tax that was distributed by way of dividend.

When calculating the tax liability in accordance with these Rules, should the shareholder of the principal taxpayer be registered for Maltese income tax refund purposes, the fiscal unit is allowed to apply a rate of income tax which, effectively offsets the refund due to the shareholder/s against the income tax due by the principal taxpayer.

Essentially, this improves the taxpayers’ liquidity position since it allows for the immediate payment of the effective tax rate, thereby addressing cashflow problems of the normal regime stemming from the time lag between the date of the tax payment by the taxpayers and the date of receipt of refund by their shareholders.

Furthermore, a fiscal unit does not need to distribute a dividend to achieve a tax-efficient result and therefore, it is solves any issues relating to insufficient reserves available for distribution.

3. Fiscal unity offers a wider scope

These Rules provide for a wider scope of application because apart from not being restricted to a particular industry, they may also prove useful within a local context. This due to providing for unabsorbed tax losses and capital allowances (including balancing allowances) and unutilised tax credits to be surrendered and taken over by the principal taxpayer i.e. such balances of the subsidiaries will be considered a balance of the principal taxpayer.

In any circumstance in which these provisions do not apply and therefore the said balances are retained by the subsidiary, such balances shall not be taken into account for the purposes of the Maltese Income Tax Act for as long as the subsidiary remains a transparent subsidiary. Once the transparent subsidiary exits the fiscal unit, such balances shall once again become available to the subsidiary without deduction or limitation.

A different decision may be adopted for different subsidiaries.

4. Financial statements and tax compliance obligations

The principal taxpayer of the fiscal unit is required to prepare audited consolidated financial statements on an annual basis exclusively for those entities within the fiscal unit and filing the annual tax return on behalf of the fiscal unit.

Given that the principal taxpayer must file one tax return on behalf of the fiscal unit, the other members of the fiscal unit are exempted from filing their respective tax returns. However, an additional supplementary document is required to be filed by the principal taxpayer.

Nonetheless, the members of the fiscal unit shall be jointly and severally liable for the payment of tax.

Key takeaways

While it is clear that there may be further compliance obligations (and costs), especially with regards to the preparation of audited consolidated financial statements of the fiscal unit, a number of (possibly larger) groups may take advantage of these Rules, mainly due to their possibility of achieving a better cashflow position and an equally efficient tax result.

How can Fenlex help?

We would be pleased to discuss these Rules with you in further detail, particularly with regards to their applicability and the possible opportunities that such Rules may present in the context of your group of entities. Please reach out to us if you would like to discuss further.

Please note that this article is being published for information purposes only and therefore, it does not constitute or should not be interpreted or construed as legal advice or guidance.