Group of Companies Tax Consolidation
On the 31st of May 2019, by means of Legal Notice 110 of 2019, the Consolidated Group (Income Tax) Rules, 2019 (hereinafter “the Rules”) have been enacted which provide for an optional tax consolidation of companies forming part of a group, as defined in the Rules. The Rules are open to all industries, unlike the VAT grouping rules which are open only to specific industry sectors and are applicable for fiscal units having accounting periods commencing in calendar year 2019 and subsequent years. Below is a generic overview of the Rules.
How do the Rules define a fiscal unit?
The rules define a parent company as a company that meets the definition of a company registered in Malta in the Income Tax Act and that holds a subsidiary/ies and which meets any two of the following conditions:
(a) the parent company holds at least ninety-five per cent (95%) of the voting rights in the subsidiary company;
(b) the parent company is beneficially entitled to at least ninety-five per cent (95%) of any profits available for distribution to the ordinary shareholders of the subsidiary company;
(c) the parent company would be beneficially entitled to at least ninety five per cent (95%) of any assets of the subsidiary company available for distribution to its ordinary shareholders on a winding up
Furthermore, the parent and its subsidiary/ies shall have the same accounting year end. Subsidiaries of the 95% subsidiary of the parent company shall also form part of the same fiscal unit if the conditions are satisfied.
How are trusts and foundations treated in relation to a fiscal unit?
For so long as, the beneficiary of a trust or a foundation has a vested right, whether resulting from the terms of the settlement or the deed of foundation or whether subsequently arising as a result of the exercise of a power or discretion by the trustee of the trust or the administrator of the foundation, to at least ninety-five per cent (95%) of the distributable income of the trust or foundation and at least ninety-five per cent (95%) of the capital of the trust or foundation, the fiscal unit definition is deemed to have been satisfied.
How will a group of companies opt to form a fiscal unit?
An election must be made on the form to be prescribed by the Commissioner of Inland Revenue and shall be applicable as from the year of assessment in which it is made. The principal taxpayer (the parent company) shall assume the rights, duties and obligations under the Income Tax Acts relative to that fiscal unit. Revocation of such an election is possible subject to the conditions to be stipulated by the Commissioner.
Will all balances of the various subsidiaries be carried forward?
Yes, the Rules provide that tax credits, unabsorbed capital allowances, unabsorbed tax losses, balances in the tax accounts excluding the untaxed account and all balances that may be carried forward in terms of any other law shall be considered to be a balance of the principal taxpayer.
What happens if a company ceases to have same year end as the parent company or ceases to satisfy the group conditions?
In this case, if the company is a subsidiary, itself and its subsidiaries will cease to form part of the fiscal unit as form the basis year in which it no longer satisfies the conditions. There are other conditions in relation to exiting the fiscal group in relation to carry forward amounts and assets.
What will be the chargeable income of the fiscal unit?
The chargeable income of a fiscal unit for a year of assessment shall be computed as if such income was derived by the principal taxpayer and shall be chargeable to tax in the name of the principal taxpayer. All those transactions occurring between two or more companies forming part of the fiscal unit shall be deemed not to have occurred except for property transfers or transfers of shares in a property company as well as dividends distributed to the parent company from its subsidiaries prior to forming the fiscal unit.
Will these Rules affect the applicability of the tax refund system in terms of Article 48 of the Income Tax Management Act?
Where the refund system would have applied to a shareholder of a company that forms part of a fiscal unit and such shareholder is specifically empowered to consolidate its results pursuant to Maltese law, the chargeable income of the fiscal unit shall be subject to tax at the effective rate of tax after taking into consideration the refund which would have been due to the shareholder. This effectively means that the parent company would not pay 35% on its profits but rather the net effective tax rate after the refund would have to be paid.
Contact our tax team to obtain more information on how these new Rules apply to your company/ies.
Tax Advisory Services
Disclaimer – This document is being provided as a generic guide only and should not be taken to constitute advice. Separate advice is to be sought for particular scenarios.