Malta introduces ruleset on fiscal unity

On 31 May 2019 Malta introduced a fiscal unity regime by means of the ‘Consolidated Group (Income Tax) Rules’, Legal Notice 110 of 2019 (the ‘Rules’). The Rules shall enter into force from year of assessment 2020.

Forming a fiscal unit

In terms of the Rules, a parent company may make an election in order for itself, and its 95% subsidiary to form a fiscal unit, provided that such subsidiary has the same accounting period as its parent company. A parent company shall mean a company holding shares in another company and satisfying two of the following conditions:

• The parent company holds at least 95% of the voting rights in the subsidiary company;
• The parent company is beneficially entitled to at least 95% of any profits available for distribution to the ordinary shareholders of the subsidiary company;
• The parent company would be beneficially entitled to at least 95% of any assets of the subsidiary company available for distribution to its ordinary shareholders on a winding up.

Where the abovementioned election is made, each 95% subsidiary in respect of which the election is made shall form part of the same fiscal unit of its parent company, with such subsidiaries being referred to as ‘transparent subsidiaries.’ Similarly, where the transparent subsidiary is itself a parent company, its 95% subsidiaries shall also join the fiscal unit.
The principal taxpayer of a fiscal unit shall be a company within the fiscal unit which is not a transparent subsidiary and is the parent company of one or more transparent subsidiaries. Companies which are not resident in Malta may form part of a fiscal unit, however the principal taxpayer must at all times qualify as a company registered in Malta. The latter term includes a non-Malta tax resident company maintaining a permanent establishment in Malta.

Chargeable income of a fiscal unit

Members of the fiscal unit, other than the principal taxpayer, shall be transparent entities for Malta income tax purposes. As a result, any income and gains derived by transparent subsidiaries shall be directly allocated to the principal taxpayer. Similarly, expenditure and capital allowances incurred by transparent subsidiaries is directly allocated to the principal taxpayer.

Transactions between members of the fiscal unit shall be disregarded, with the exception of transfers of immovable property situated in Malta, and transfers of property companies.

Income or gains allocated to the principal taxpayer shall retain their character and source. The Rules, however, contemplate a number of deemed source rules. For example, income or gains derived by a non-Malta tax resident transparent subsidiary shall be deemed to be attributable to a permanent establishment of the principal taxpayer situated outside Malta insofar as the transparent subsidiary maintains sufficient substance therein

Furthermore, any foreign income tax suffered by a company forming part of the fiscal unit, shall be deemed to have been incurred by the principal taxpayer, and relief from double taxation in accordance with the Income Tax Act shall be allowed accordingly.

Compliance obligations of a fiscal unit

The fiscal unity regime is optional. Should a fiscal unit be formed, the principal taxpayer shall, for each year, be required to prepare a consolidated balance sheet and consolidated profit and loss account covering all companies within the fiscal unit. The principal taxpayer shall also be responsible for filing the tax return of the fiscal unit, with other members of the fiscal unit being exempted from filing their respective tax returns.

The Members of the fiscal unit shall be jointly and severally liable for the payment of tax. Apportionment mechanisms are in place for those instances where the transparent subsidiary is not wholly owned by the principal taxpayer or by a parent company.

A company (and its transparent subsidiaries) shall exit a fiscal unit in the event that (1) such company no longer remains a 95% subsidiary or (2) it no longer has the same accounting period as the principal taxpayer. The conditions in terms of which companies may opt for a voluntary exit, other than the foregoing, have yet to be defined.