Income Tax Consolidation has become an option in Malta from YA 2020 (Basis Year 2019) by virtue of Legal Notice 110 of 2019.
A parent company now, who has a subsidiary situated in Malta now has the choice to elect to form a Fiscal Unit for Income Tax purposes. Both the Parent company and the subsidiary must have the same accounting financial reporting year-end and the Parent Company must have at least two from the following:
- 95% of the voting rights;
- is entitled to 95% of profits available on distribution;
- is entitled to 95% of assets upon liquidating.
The Income Tax Consolidation Unit is specifically for Income Tax purposes and should not be confused with the VAT Grouping rules, which set out separate conditions for VAT legislation specifically.
The Parent Company needs to inform the Inland Revenue Department by way of an election that it intends to form an Income Tax Consolidation Unit. All eligible subsidiaries will join the fiscal unit of the Parent Company and will be known as “transparent entities” for Income Tax purposes in Malta. The Parent Company, on forming an Income Tax Consolidation Unit, will become the principal taxpayer and assumes the rights, duties and obligations under the Income Tax Act for the entities in its fiscal unit. A “transparent subsidiary” cannot be the principal taxpayer and no company shall be part of another Income Tax Consolidation Unit.
Chargeable Income of an Income Tax Consolidation Unit
- While the nature and sources of the income remain unchanged, in calculating the chargeable income of a Fiscal Unit, the following should be considered:
- Any income/gains earned by transparent entities is directly allocated to the principal taxpayer (parent company).
- All transactions between members of the same fiscal unit are ignored unless it involves the transfer of immovable property situated in Malta or a transfer of shares in a property company as defined by the Income Tax Act.
- Any balances carried forward including capital allowances, unused tax credits and any unutilised losses are taken over by the principal taxpayer (parent company).
- All tax accounting balances are treated as balances of the principal taxpayer (parent company) except for the Untaxed Account.
- Any foreign income tax suffered by a member of the fiscal unit shall be considered as suffered by the principal taxpayer and double taxation relief may be applied in accordance with the provisions of the Income Tax Act.
The introduction of this legislation allows for a parent company in an Income Tax Consolidation Unit who is entitled to a refund upon distribution of a dividend from its subsidiaries to consolidate. The result of this meaning that the whole fiscal unit shall be entitled to a lower tax rate and thus more tax-efficient subject to satisfying some anti-abuse mechanisms.
It should be highlighted that the formation of an Income Tax Consolidation Unit is completely optional by the taxpayer. However, should a fiscal unit be established the primary taxpayer would require a consolidated audited balance sheet and profit and loss account covering all companies that form part of the Income Tax Consolidation Unit. The responsibility of filing the income tax return for the fiscal unit sits with the principle taxpayer and thus the parent company would file on behalf of all companies within the Income Tax Consolidation group. The remaining members of the Income Tax Consolidation group are exempted from filing individual tax returns. However, all members are jointly held responsible for the payment of tax, interest on tax or any penalties on tax.
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