Malta introduces rules on tax consolidation

As from year of assessment 2020, groups of companies may make an election to be considered as one fiscal unit in terms of the Income Tax Act. As a result, they would file only one income tax return in respect of all the companies forming part of that fiscal unit.

Formation of a Fiscal Unit

In a fiscal unit, subsidiaries are referred to as transparent companies, whereas the parent company is referred to as the principal taxpayer.

A fiscal unit may be formed by a parent company together with one or more of its 95% subsidiaries with the condition that all companies have the same accounting period, subject to the approval of the other holders of the subsidiaries (excluding the parent company). In the case where a subsidiary is itself a parent company of one or more 95% subsidiaries, its transparent companies shall join the same fiscal unit originally formed by the parent company of such subsidiary. This avoids having companies forming part of more than one fiscal unit, which is not allowed under these rules.

Obligations of the parent company as the principal taxpayer of the fiscal unit

Once a fiscal unit is formed, the principal taxpayer assumes all rights, duties and obligations under the Income Tax Acts relative to the fiscal unit. Any balances carried forward under the Act, such as tax credits, as well as balances of profits allocated to tax accounts, are considered to be balances of the principal taxpayer. This means that the chargeable income of the fiscal unit is computed as if such income was derived by and in the name of the principal taxpayer.

Furthermore, transactions carried out within the fiscal unit, subject to some exclusions, shall not be taken into account.  Other conditions exist as to the calculation of chargeable income applying to specified circumstances.

The principal taxpayer would also be responsible to prepare a set of audited consolidated financial statements covering all companies forming part of the fiscal unit, on which the tax return of the fiscal unit would be based. Although, the tax return of the fiscal unit would be filed by the principal taxpayer, all companies forming part of the fiscal unit would be jointly and severally liable for the payment of tax, additional tax and interest due by the fiscal unit.

Changes to the fiscal unit

In the case where a transparent company is no longer a 95% subsidiary or no longer has the same accounting period as the fiscal unit, such company would no longer be deemed to form part of the fiscal unit.

If an existing company no longer forms part of the fiscal unit, or the fiscal unit ceases to exist, any balances of trading losses, capital allowances, losses claimed under the group loss relief, and profits allocated to tax accounts shall be retained by the principal taxpayer.

If you would like to assess whether these tax rules may apply to your group of companies or for further information, please get in touch on [email protected]