On May 31 2019, Malta introduced a fiscal unity regime by means of the Consolidated Group (Income Tax) Rules, 2019 (the rules) (LN110 of 2019). The rules allow the formation of tax groups for domestic income tax purposes.
The rules are due to enter into force from the 2020 tax assessment year for fiscal units that have accounting periods starting in the 2019 calendar year and subsequent years. They are applicable to parent companies looking to form a fiscal unit with their subsidiaries.
A Malta resident parent company, which holds a 95% shareholding in one or more of its subsidiaries, may elect to form a fiscal unit with these subsidiaries. The fiscal unit will become effective as of the tax assessment year in which the application is made.
The rules define a 'parent company' as a company that holds shares in another company (subsidiary company). A parent company must meet any two of the following conditions in the year preceding the year in which the application is made:
- The parent company holds at least 95% of the voting rights in the subsidiary company;
- The parent company is beneficially entitled to at least 95% of any profits available for distribution to the ordinary shareholders of the subsidiary company; and/or
- 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 on a winding up.
A subsidiary of a parent company that meets any two of the conditions will be deemed a '95% subsidiary' and will accordingly qualify to form a fiscal unit with its parent company. On the other hand, in the event that any two of the conditions are satisfied at 100%, the subsidiary will be categorised as a '100% subsidiary'.
The members of a fiscal unit may be Maltese resident companies or foreign entities, provided that the principal taxpayer is resident in Malta. Although such foreign entities need not be tax resident in Malta, they must be registered in Malta.
Pursuant to the formation of a fiscal unit, the respective 95% subsidiary will become a 'transparent subsidiary' for the purposes of the rules, whereas the parent company will acquire the status of a 'principal taxpayer' in relation to its direct and indirect transparent subsidiaries. It follows suit that any income and gains derived by transparent subsidiaries will be directly allocated to the principal taxpayer. All members of the fiscal unit, except the principal taxpayer, will be deemed transparent for Malta income tax purposes.
A successful application to form a fiscal unit is furthermore subject to the following requirements:
- The relevant 95% subsidiary must have its accounting period beginning and ending on the same dates as the accounting period of the parent company in all the years in which it forms part of the fiscal unit; and
- Where the 95% subsidiary is not a 100% subsidiary of the parent company, a successful election will require the approval of the holders of the equity shares which are not owned directly or indirectly by the parent company.
Where a parent company has opted to form a fiscal unit with a 95% subsidiary under the rules and where that subsidiary is itself a parent company of one or more transparent subsidiaries, then the 95% subsidiary and its transparent subsidiaries will be included in the fiscal unit of the first mentioned parent company.
The rules prohibit a company from forming part of more than one fiscal unit at any one time. Where a principal taxpayer that forms a fiscal unit with one or more transparent subsidiaries is included in the fiscal unit of another parent company, the fiscal unit of the principal taxpayer with its own transparent subsidiaries will cease to exist. It may be noted that once a fiscal unit is formed, the principal taxpayer's transparent subsidiaries will automatically join the fiscal unit.
Consequences of the fiscal unit
Once a fiscal unit has been formed it will be registered as such. The principal taxpayer will assume the rights, duties and obligations under the Income Tax Act, Chapter 123, of the Laws of Malta (ITA) relative to that fiscal unit. In turn, in so far as the fiscal unit is in existence, the rights, duties and obligations of the companies within the fiscal unit will be suspended for those assessment years during which the companies form part of the fiscal unit.
In relation to the aggregation of balances, the balance of any item allowed to be carried forward by the 95% subsidiary, including any other tax credits that may be carried forward, and the balance of any profits allocated to the tax accounts, excluding the untaxed account, of the 95% subsidiary existing at the end of the basis year preceding that with regard to which the application becomes effective, shall be considered to be a balance of the principal taxpayer.
In the event that the subsidiary is not a 100% subsidiary, the aggregation of balances will be subject to the approval of the holders of the equity shares which are not owned, directly or indirectly, by the parent company.
As regards chargeable income and 'ignored transactions' by the fiscal unit, any income and gains, as well as all outgoings, expenditure and capital allowances, derived or incurred by transparent subsidiaries will be directly allocated to the principal taxpayer. Therefore, a fiscal unit's chargeable income for any tax assessment year will be calculated as if the income was derived by the principal taxpayer.
The fiscal unit's income will be taxable in the name of the principal taxpayer at its applicable effective tax rate. This would result in a cashflow advantage to the respective members within the fiscal unit, as those members would circumvent the operation of the Malta tax payment and refund system.
The calculation of the fiscal unit's chargeable income is subject to a number of principles that are specific to the fiscal unity regime provided by the rules.
All transactions between two or more companies in the fiscal unit in the year preceding the year of assessment will be disregarded (the 'ignored transactions'). However, dividends distributed by a transparent subsidiary to its parent company out of taxed profits that it derived prior to becoming a transparent subsidiary will not be deemed an ignored transaction. Such dividends will be treated as dividend income derived by the principal taxpayer of the fiscal unit of which the transparent subsidiary forms part.
All income derived by members of the fiscal unit in the year preceding the assessment year and which are not ignored transactions, will be treated as having been derived by the principal taxpayer. Nonetheless, any such income will retain the same character and will be deemed to have been derived from the same source and the same country – and be allocated to the same tax account – as if the income was received by the principal taxpayer. The transparent subsidiaries' distributable profits will be allocated to the untaxed account.
The rules also stipulate that any interest held by a transparent subsidiary in any body of persons that do not form part of the fiscal unit will be deemed to be held directly by the principal taxpayer. Any foreign tax paid by a company within the fiscal unit will be deemed to have been incurred by the principal taxpayer.
The principal taxpayer will have to allocate the profits attributable to itself in terms of these rules to the same tax accounts and in the same manner as it otherwise would have, had it derived those profits directly.
All members of the fiscal unit, other than the principal taxpayer, are exempt from the requirement of filing a self-assessment and income tax return as it is the responsibility of every principal taxpayer to file a self-assessment and return in respect of the fiscal unit and on behalf of all members of the unit.
After the formation of the fiscal unit, the obligations with respect to the filing of the income tax return and payment of corporate income tax are to be carried out by the principal taxpayer on behalf of the fiscal unity and its members.
The principal taxpayer and (if present) its 100% transparent subsidiaries will be jointly and severally liable for the payment of tax, additional tax and interest due by the fiscal unit. The tax due by the fiscal unit may be apportioned between the principal taxpayer and its 100% subsidiaries, which are transparent subsidiaries, as the principal taxpayer may determine. The same is also possible with respect to a transparent subsidiary, which is a 95% subsidiary, provided that such apportionment is made in accordance with an agreement between the principal taxpayer and all of the holders of shares in that 95% subsidiary which are not held directly or indirectly by the principal taxpayer.
As regards consolidated statements, from a practical point of view, the rules do enable the principal taxpayer to submit consolidated financial statements. Therefore, the principal taxpayer is responsible for preparing consolidated balance sheets and profit and loss accounts covering all the companies within the respective fiscal unit. The consolidated balance sheet and profit and loss account must comply with the relevant provisions of the Companies Act, Chapter 386, of the Laws of Malta and must be accompanied by a report written by a certified public auditor.
Exiting a fiscal unit
In the event that a transparent subsidiary no longer satisfies the conditions to be classified as a 95% subsidiary, or if its account period fails to start and end on the same dates as those of the principal taxpayer, then the transparent subsidiary will no longer form part of the fiscal unit. This is effective from the basis year in which that subsidiary no longer meets the conditions.
Where a fiscal unit application is revoked in accordance with conditions as may be required by the Commissioner, the transparent subsidiaries belonging to the parent company which has revoked the application will be classified as exiting companies for the purposes of the rules.
If the exiting subsidiary is itself the parent company of one or more transparent subsidiaries, the exiting subsidiary and its transparent subsidiaries will be considered (once again) as forming a separate fiscal unit, if registered as such. However, where the exiting subsidiary becomes a 95% subsidiary of another parent company and where that other ultimate parent company elects to form a new fiscal unit, the exiting subsidiary and all its subsidiaries will immediately become part of the new fiscal unit.
Where an exiting company ceases to be part of a fiscal unit or where a fiscal unit as a whole ceases to exist in accordance with the scenarios described above, the fiscal unit's principle taxpayer will continue to be responsible for the balance of any trading loss, unabsorbed deductions for wear and tear; losses claimed under the group relief provisions and any other loss, allowance or otherwise; and the balance of any profits allocated to the tax accounts considered to be balances pertaining to the principal taxpayer.
The cost of any assets owned by the exiting company or the fiscal unit resulting from the exit of the subsidiary will be deducted from the cost of assets attributable to the principal taxpayer of the old fiscal unit.
Where the relevant assets consist of or include assets in respect of which a deduction in terms of Article 14 of the ITA has been claimed by the principal taxpayer or any company forming part of the old fiscal unit prior to joining such old fiscal unit, the exiting company or the resulting fiscal will be entitled to continue claiming a deduction in respect of the relevant assets in the same manner and on the same basis as would have been claimed by the principal taxpayer. This is conditional on the exiting companies meeting the requirements applicable to such deductions.
The main benefit of a fiscal unit is that all intragroup transactions (apart from transfers of immovable property) between members of a fiscal unit, which would normally carry certain tax consequences, are ignored for tax purposes.
Compliance costs for companies within a fiscal unity are expected to be significantly reduced, since all fiscal compliance obligations only need to be adhered to by the principal taxpayer, as opposed to each individual subsidiary. The scope of the rules is not restricted to a particular sector or industry, as opposed to the VAT grouping rules, which are solely applicable to the banking and gaming sectors.
|Dr Donald Vella|
T: +356 2123 8989
Donald Vella is a partner at Camilleri Preziosi responsible for corporate law, taxation and private clients.
He regularly advises clients from various industry sectors including financial institutions, private equity and hedge fund promoters and managers, professional trustees, as well as high-net-worth individuals.
During his time at Camilleri Preziosi, he has advised and assisted international clients on Maltese corporate law and taxation regarding a wide range of transactions. He also regularly represents clients in courts and fiscal tribunals on direct and indirect taxation matters. In Malta, Donald is particularly active in advising clients in corporate M&A and corporate restructuring transactions.
He regularly acts as an examiner at the University of Malta and is a speaker at a number of seminars and conferences.
|Dr Kirsten Cassar|
Tel: +356 2567 8117
Kirsten Cassar's main practice areas include mergers and acquisitions, corporate restructuring, domestic and international tax advisory and restructuring, and providing advisory services particularly on tax efficient structures for local and cross-border transactions.
Kirsten also regularly assists in advising clients on the corporate law aspects of a wide range of transactions and other areas including corporate finance, M&A and capital markets. This provides clients with a comprehensive insight on a wide range of matters.
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