[CORPORATE TAXATION] CONSOLIDATED GROUP INCOME TAX RULES
The consolidated group income tax rules were introduced in May 2019 by way of Legal Notice 110 of 2019. These rules which form an integral part of the Income Tax Act shall be effective as from accounting periods commencing in 2019.
FISCAL UNIT
Under these new rules, in general, companies forming part of the same group may elect to be treated as one taxpayer i.e. a fiscal unit for income tax purposes, hence eliminating intra-group transactions / transactions between companies forming part of the same fiscal unit.
For the purposes of these rules, a subsidiary (company) can be consolidated with its parent company, if such parent company would satisfy at least two of the following 3 conditions:
(a) The parent company holds at least ninety-five per cent (95%) of the voting rights in the subsidiary company; or
(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; or
(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;
In addition the both parent and subsidiary should have the same accounting year beginning and ending on the same dates during all years during which such parent and subsidiary elect to be treated as one fiscal unit.
Infact all subsidiaries of a parent company which satisfy at least 2 of the three conditions (a) to (c) listed above can join the fiscal unit and which implies that fiscal unit for the purposes of these rules can consist of the consolidation of more than 2 companies.
CHARGEABLE INCOME
Under these rules the chargeable income of a fiscal unit for a particular 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. Any income or gains derived by transparent subsidiaries shall be directly allocated to the principal taxpayer. Similarly, expenses and capital allowances are also directly allocated to the principal taxpayer.
It is important to note all transactions occurring between two or more companies forming part of the fiscal unit and which transactions include: receipts, payments, revenues, expenses, transfer of assets, distributions, shall be deemed not to occur (referred to in the rules as “ignored transactions”). There are certain transactions such as transfers of immovable property falling within the scope of Article 5A of the Income Tax Act and transfer of shares in a property companies which cannot be included in the fiscal unit and hence not deemed to constitute “ignored transactions” for the purposes of these rules. Hence such transactions will not be ignored for the purposes of these rules even if such transactions are carried out between companies which form part of the fiscal unit.
These new rules applied in the context of a parent and subsidiary where such parent company has the right to claim refund of tax on the profits which have been distributed as a dividend (in terms of Article 48 of the Income Tax Management Act), will now enable the fiscal unit to pay only the effective tax i.e. the difference between the corporate tax payable by the subsidiary and the refunds which may be claimed by its shareholder.
Furthermore, any foreign tax which is suffered by the company forming part of the fiscal unit shall be deemed to have been suffered by the principal taxpayer and hence double tax relief may be claimed against the income of such principal taxpayer.
The application of these rules will require principal taxpayer to prepare consolidated audited accounts covering all the companies which form part of the fiscal unit.
Under certain circumstances, companies which are not resident in Malta may still form part of a fiscal unit.
Only the principal taxpayer shall be obliged to file a tax return and all the other companies which form part of the fiscal unit shall, in terms of Article 12 of these Rules, be exempted from preparing and filing a tax return.
Details rules are prescribed for entities forming part of the fiscal unit which no longer satisfy the fiscal grouping criteria and hence will exit from the fiscal unit.
For more information on the application of these rules, kindly contact:
Franco Falzon C.P.A. LL.M
(Managing Partner)
E: franco@ffinternational.com.mt
T: +356 2010 7771 (office)
M: +356 9989 5679 (mobile)
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