Group Deductions (Income Tax) Rules, 2022

On 19 July 2022, the Group Deductions (Income Tax) Rules, Legal Notice 205 of 2022 (the ‘Rules’) which was one of the several measures outlined by the 2022 Malta Budget speech was published by the Minister responsible for Finance pursuant to the powers conferred by articles 14(2) and 96 of the Income Tax Act, Chapter 123 of the Laws of Malta (the ‘ITA’).

Background

The Rules are one of the 2022 Budget Measures aimed at assisting the recovery of groups of companies that suffered adverse consequences due to the COVID-19 pandemic and are to come into force from the year of assessment 2022 for the purposes of allowing qualifying companies that incurred losses during FY2020 and FY2021 to surrender any unabsorbed capital allowances to qualifying profitable group companies during FY2021.

The Rules

In terms of rule 3 of the Rules, ‘allowable deductions’ may be surrendered by a ‘surrendering company’ and, on the making of a claim by the ‘claimant company’, be allowed to the latter company as a deduction against its total income.

In addition, the surrendering of ‘allowable deductions’ shall only be allowed if either the ‘surrendering company’ or the ‘claimant company’ is a ‘beneficiary’ in terms of the Rules.

The definition of a ‘beneficiary’ for the purposes of the Rules means a company which has been granted a benefit under the COVID-19 fiscal assistance – Repayment of taxes eligible under the Tax Deferral Scheme.

The Rules shall apply to companies which are members of the same group and for the purposes of the Rules, group within scope shall be qualifying groups in terms of the group relief provisions as defined in article 16 of the ITA. In this respect, article 16 of the ITA provides that, for the purposes of group relief provisions, two companies resident in Malta but neither of which is resident for tax purposes in any other country shall generally be deemed to be members of a group of companies if one is the 51% subsidiary of the other or both are 51% subsidiary of a third company resident in Malta. By way of an exception, it is to be noted that the limitation in the group loss provisions in terms of Article 18(1)(c) and (d) of the Rules, restricting the deductibility of an allowable loss to specific tax accounts has been deactivated for the purposes of the Rules.

Allowable deductions that can be absorbed by another company within a group for the purposes of the Rules are defined as capital allowances allowable as a deduction under article 14(1)(f) and (j) of the ITA, to the extent that such deduction cannot be given effect to in full because there are no profits or gains chargeable for the year of assessment 2022 from the source of income in respect of which they are allowable or because the profits or gains chargeable from that source are less than the deduction. By way of a background, article 14(1)(f) and (j) contemplate depreciation rules in relation to industry buildings or structures and plant and machinery where such assets are used and employed in the production of the taxpayer’s income

The surrendering claim in terms of rule 3 of Rules shall not exceed €1,000,000 per group of companies, nor shall it exceed the claimant company’s total income for the year of assessment 2022.

The Guidance Note

Furthermore, the Commissioner for Revenue has issued the Group Deductions Guidance Note (the ‘Note’) to further clarify the provisions of the Rules. The Note emphasises that the balancing allowance in terms of article 24 of the ITA are also considered as an allowable deduction. In addition, the Note clarifies that allowable deductions are available for set-off against any taxable income of the claimant company and are therefore not limited to trading income

To benefit under the Rules, the claimant company would be able to avail itself of an allowable deduction in the year of assessment 2022 income tax return through the addition of a new attachment to be duly filled in the ‘Group Deductions (Income Tax) Rules, 2022 - TRA 125’. The same attachment is to be filled in by the surrendering company as well as the claiming company when surrendering or claiming allowable deductions.