Income Tax Consolidation in Malta

Malta has recently introduced fiscal unity rules which enable tax groups to be formed for Maltese income tax purposes. This follows the issuance of the Consolidated Group (Income Tax) Rules (L.N. 110 of 2019).

Formation of a Fiscal Unit
A group of companies can now choose to be treated as a single taxpayer, subject to certain statutory conditions. This will begin with the 2020 assessment year for companies, whose accounting periods started in calendar year 2019. This requires the parent company to choose for itself and its subsidiary/ies to form a fiscal unit, a move which would result in the subsidiary/ies being treated as  transparent. 

After this choice, each eligible subsidiary will form part of the same fiscal unit of the parent company and will be referred to thereafter as a “transparent entity”. The principal taxpayer will be the company which assumes the rights, duties and obligations under the Income Tax Act, relative to entities forming part of its fiscal unit and which cannot be a transparent subsidiary. No company shall form part of more than one fiscal unit.

Definition of a Parent Company
A parent company is defined as a company which holds shares in a “subsidiary” that – in the year prior to the year of assessment (as defined by a decision under the terms of rule 3(1)) – meets any two of the following conditions:

• The parent company holds at least 95% of the voting rights in the subsidiary company. This is only possible if the accounting periods of all members are the same and are subject to the consent of any minority shareholders;
• The parent company is beneficially entitled to at least 95% of any profits available for distribution to the ordinary shareholders of the subsidiary company;
• The parent company would be beneficially entitled to at least 95% of any assets of the subsidiary company available for distribution to its ordinary shareholders if the firm were to be wound up.

Reporting obligations
When a fiscal unit is established, tax shall be payable by the principal taxpayer on behalf of all members of the group, with only one tax return being filed. All members are jointly liable for the payment of any tax, additional tax or interest. Principal taxpayers are also responsible for the preparation of a consolidated, audited balance sheet and consolidated profit and loss account covering all companies in the fiscal unit

Nevertheless, tax calculations will still be required for each company and also for the fiscal unit as a whole, in order to compare tax liabilities and satisfy the anti-abuse provision.

A company may exit the fiscal unit in the event of it ceasing to be a 95% subsidiary, or if it no longer has the same accounting period as the principal taxpayer. To date, regulations allowing a voluntary exit by companies forming part of a fiscal unit have not been established.

Benefits
The main benefit of choosing fiscal unity regards cash flow compared to the current regime of partial shareholder tax refunds after the distribution of taxed profits. Thanks to fiscal unity, the group has an identical effective tax rate without a time lag between the payment of the standard corporate income tax rate (35%) and the receipt of the shareholder refund at the level of the shareholder. This is because the new rules immediately reduce the tax due from the principal taxpayer to the lower effective tax rate. However, tax consolidation may also be useful within a local context as it is wider in scope than when tax trading losses are surrendered.