Fiscal Consolidation

In terms of Rule 3 of the Subsidiary Legislation, a parent company may make an election in order for itself and its 95% subsidiary to form a fiscal unit, provided that companies forming as part of this fiscal unit, have co-terminus year-ends. To be considered as a 95% subsidiary of another entity, 2 of the following conditions would need to be satisfied:

1. The parent company holds at least 95% of the voting rights in the subsidiary company.
2. The parent company is beneficially entitled to at least 95% of any profits available for distribution.
3. The parent company is beneficially entitled to at least 95% of any assets of the subsidiary company available for distribution to its shareholders in the case of winding up,

When the election to form part of a fiscal unit 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”. 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 of more subsidiaries.

Companies which are resident in Malta may form part of the fiscal unit, however the principal taxpayer of the fiscal unit must always be a company which is registered in Malta, which further includes a company not resident in Malta maintaining a permanent establishment in Malta. No company can form part of more than one fiscal unit at any given time and an election made in terms of this rule may be revoked by the Commissioner for Tax and Customs (“CfTC”)  as he may require.

Once the fiscal unit has been successfully registered with the tax authorities in Malta, any balances which existed at the end of the basis year preceding that in which the fiscal unit was elected shall be considered to be a balance of the principal taxpayer. Therefore, any balances of any item carried forward such as capital allowances, unabsorbed trading losses or any tax credits which have been carried forward in terms of the law, shall now be considered belonging to the principal taxpayer and can be utilised by the fiscal unit. Furthermore, any balances of profits allocated to the tax accounts, excluding the untaxed account shall also be of the principal taxpayer.

Members of the fiscal unit, other than the principal taxpayer, shall be considered as transparent entities for Malta Income Tax purposes and therefore, any income or gains derived by the transparent subsidiaries shall be deemed to have been generated by  the principal taxpayer. Similarly, any expenditure considered as deductible at the level of the transparent subsidiary shall be deemed to have been incurred by the principal taxpayer.

When computing the chargeable income of the fiscal unit, any transactions which occur between two or more companies forming part of the same fiscal unit, shall be deemed to not have occurred and are disregarded for tax purposes (i.e., “ignored transactions”). The legal notice does however carry a proviso to this definition as such approach is not taken into consideration when intercompany transactions relate to any transfers of property situated in Malta or any transfers in property companies.

Following the determination of the chargeable income attributable to the fiscal unit, the principal taxpayer must segregate the different income streams being generated by the group and apply the formula catered for in the Legal Notice. By applying such formula, the fiscal unit will be subject to an effective tax rate consistent with Malta’s income tax regime.

Should a fiscal unit be formed, the principal taxpayer shall assume the responsibility to file the consolidated income tax return based on an audited set of consolidated financial statements. While such requirement stemming out from the rules require that an audited set of financial statements are to be prepared, such financial statements are not required to be presented to the Malta Business Registry or the Commissioner for Revenue unless such financial statements have been directly requested upon an investigation of the fiscal unit. Furthermore, any company which is a transparent subsidiary in the fiscal unit, shall not be required to submit any income tax returns if it forms part of the fiscal unit. The principal taxpayer and its transparent subsidiaries shall be jointly and severally liable to any payment of tax and additional interest if it falls due by the fiscal unit. Mechanisms to apportion the payment obligation of tax can be put into place through the establishment of a funding arrangement between the principal taxpayer and the transparent subsidiaries of the fiscal unit.

Rule 13 of the Legal Notice also sets out some conditions in relation to anti-abuse measures considered by companies in the fiscal unit. When the tax payable by the principal taxpayer is lower than 95% of the aggregate of the tax that would have been payable by all the members of the fiscal unit, there is deemed to be an advance to the shareholders falling under the deemed dividend distribution rules of the Income Tax Act (Article 46).

The amount to be treated as an advance shall be treated as a deemed untaxed dividend to the principal taxpayer of the fiscal unit and the item to be treated as an advance to the principal taxpayer is the amount which is equal to the difference between the tax payable by all members of the fiscal unit and the tax payable by the principal taxpayer divided by 35%.

Should any income tax payment be required to be made under Rule 13, such tax payment must be settled on the 14^th day following the tax return date of the year of assessment relative to that accounting year.

A company may cease to form part of the fiscal unit in the event that:

1. The transparent subsidiary no longer satisfies the 95% conditions; or
2. The transparent subsidiary no longer has the same year-end as the principal taxpayer of the fiscal unit.

Should the above be applicable, then such transparent subsidiary will be considered as the “exiting company” and will be deemed to no longer form part of the old fiscal unit, from the basis year in which that company has failed to comply with such conditions.

Fiscal unity provides a cashflow incentive for group entities, as instead of taxing business profits at the standard corporate tax rate of 35% and going through the cumbersome process of recouping part of such taxes paid through the tax payment and refund mechanism, the group can be taxed at the reduced overall effective tax rate immediately.

Although the members of the fiscal unity shall be jointly and severally liable for the payment of tax, it is the responsibility of the principal taxpayer to prepare a consolidated balance sheet and profit and loss account for all members within the fiscal unit and filing the annual tax return on behalf of the fiscal unit. The other members of the fiscal unit are exempted from filing their respective tax returns therefore decreasing compliance obligations for the group.

Fiscal unity is beneficial to all entities which meet the criteria highlighted in this article, however, for entities with a low profit margin the cost of consolidating may outweigh the benefits of fiscal unity and therefore such regime may be more beneficial to larger entities with higher taxable profits.