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Consolidated Income Tax Returns

Josef Mercieca , Tax Partner |

18 June 2019

 

Legal notice 110 of 2019 introduces for the first time, the concept of a consolidated income tax return for related entities into Maltese tax law through the Consolidated Group (Income Tax) rules. The new rules are intended to simplify the income tax calculations and tax reporting for groups of companies and will come into force with effect from the financial period commencing on or after 1st January 2019.

The election to form part of a consolidated group of companies, (which can also include trusts and foundations, with certain exceptions) (hereinafter referred to as the “fiscal unit”) is optional and if the companies are eligible it will become effective as from the year of assessment in which the election is made.

 The rules define the term principal taxpayer which is the reporting entity for the group as the parent company, which must be a company registered in Malta and which holds shares in another company, satisfying any two of the below listed conditions:

  • holds at least 95 % or more of the voting rights in the transparent subsidiary;
  • holds at least 95 % or more of the rights to profits available for distribution;
  • holds at least 95 % or more of the rights to any assets available for distribution on winding up.

The fiscal unit consists of a principal taxpayer and all its direct and indirect transparent subsidiaries, (hereinafter referred to as the “transparent subsidiaries”). In order for a group of companies to be eligible to apply under these rules, all companies within the fiscal unit must have the same accounting period end.

Where two of the above conditions are satisfied at 100%, such subsidiary will be referred as to 100% transparent subsidiary. However, where such subsidiary is 95% owned by the principal taxpayer the election will be subject to the approval of the minority shareholders (direct or indirect) of the transparent subsidiary. A company will not be allowed to form part of more than one fiscal unit at any time.

Once the fiscal unit is registered as such the principal taxpayer will assume the rights, duties and obligations under the Income Tax Act relative to that fiscal unit. Further to this, during the period of the fiscal unit’s existence the rights, duties and obligations of the transparent subsidiaries will be suspended.

 

Joining and leaving a fiscal unit:

The Rules provide guidelines as to the manner of joining and leaving a fiscal unit.

Once a transparent subsidiary decides to join a fiscal unit, any previous balances, tax credits allowed to be carried forward, and balances of any profits (excluding profits allocated to the untaxed account), will be considered to be balances of the principal taxpayer. However, where the balances must be retained by the transparent subsidiary[1] such balances will be disregarded and not taken into account in computing the tax charge of the principal taxpayer and will be available again to the transparent subsidiary once it does not form part of the fiscal unit any longer.

Where any of the transparent subsidiaries no longer satisfies the conditions prescriber under these rules it will be deemed to no longer be part of the fiscal unit with effect from the basis year, in which it ceased to satisfy those conditions.

In the above circumstances, or when the parent company decides to revoke the election (subject to the conditions that the Commissioner may require), a transparent company owning one or more subsidiaries can opt to form a separate fiscal unit and become the principal taxpayer of it.

Further to the above, any balances of trading loss, unabsorbed deductions, other losses and allowances, and profits will continue to be deemed as balances of the principal company. An exception from the above is the unabsorbed deductions resulting from assets owned by the transparent subsidiary leaving the fiscal unit. Where a deduction on the relevant assets was claimed by the principal taxpayer, or any other transparent subsidiary forming part of the fiscal unit, the transparent subsidiary leaving the unit will be entitled to continue claiming a deduction in respect of those assets. A balancing statement will be required to be prepared.

 

Chargeable income

The chargeable income of all transparent subsidiaries will be deemed to be derived by the principal taxpayer and will be subject to tax at the applicable tax rate. This applies also to expenditures and capital allowances incurred by the transparent subsidiaries.

The Rules provide that, where the principal taxpayer is a person who is not ordinarily resident in Malta or not domiciled in Malta, the following income or gains shall be attributed to the principal taxpayer:

  • all of the income and gains derived by any transparent subsidiary resident in Malta which income and gains shall be deemed to arise in Malta;
  • all the income or gains derived in Malta by a transparent subsidiary resident in Malta;
  • all income and gains derived outside Malta by a transparent subsidiary not resident in Malta, but which is received in Malta.

Any income of gains derived by a foreign transparent subsidiary will be deemed to be attributable to a permanent establishment of the principal taxpayer.

With the exception of certain transactions, any transactions two or more companies forming part of the fiscal unit shall be ignored for tax purposes. However, dividend income received by the parent company distributed out of taxed profits derived by the transparent subsidiary prior to joining the fiscal unit, shall not be ignored, and as such will be deemed to be a dividend income derived by the principal taxpayer. The latter should be allocated to the untaxed account.

In addition, transactions (except for those involving immovable property situated in Malta) between companies within the fiscal unit shall be ignored in arriving at the tax charge.

In the case of the shareholders of the principal entity or if the fiscal unit comprises shareholders entitled to tax refunds in terms of Article 48(4) or 48(4A) of the Income Tax Management Act, rather than paying tax and claiming a tax refund, the tax refund is taken into account in determining the applicable tax rate of the fiscal unit by deducting it from the tax rate applicable to the chargeable income of the fiscal unit. This achieves the same effective tax rate but avoids the payment of tax and subsequent claim for a tax refund.

Moreover, the principal taxpayer may make payments to its subsidiaries for any allowance, deduction or loss that is transferred to the principal taxpayer, and such payment will be disregarded for tax purposes in the hands of the subsidiaries and will not be allowed as a deduction at the level of the principal taxpayer.

Any income derived by a transparent subsidiary which suffers tax overseas will be deemed to be the principal taxpayer’s income and for this reason the principal taxpayer will have the right to claim a relief from double taxation.

 

Compliance

The principal taxpayer will be required and has the obligation to prepare a consolidated profit and loss account and a consolidated balance sheet for all companies in the fiscal unit for each fiscal year. Therefore, the obligation to file a tax return for the fiscal unit stays with the principal taxpayer and all subsidiaries will be exempt to file their own tax returns.

In addition, the principal taxpayer and its wholly owned subsidiaries shall be jointly and severally liable for the payment of tax, additional tax and interest due by the fiscal unit. The tax due may be apportioned between the principal taxpayer and its 95% or 100% transparent subsidiaries, however the responsibility to pay the tax rests with the principal taxpayer.

The Rules also provide for anti-abuse provisions.

 

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[1] Due to the minority shareholder not conceding to the transfer of such balances to the principal taxpayer.