The Consolidated Group (Income Tax) Rules, 2019

The Consolidated Group (Income Tax) Rules, 2019 were published recently with the objective being that of treating a parent company and its subsidiaries as one fiscal unit.

Consolidation for fiscal purpose is not obligatory but a parent may make an election to form a fiscal unit by applying to the commissioner for revenue. The fiscal unit will become effective in the year of assessment it is made, provided it cannot be done after the tax return submission date.

On consolidation, the principal taxpayer shall assume the rights, duties and obligations under the Income Tax Act relative to that fiscal unit. In order to be eligible to consolidate the results for income tax purposes, the following conditions must be satisfied:

1. The parent company which holds shares in another company must meet at least 2 of the following criteria:

a. Holding at least 95% of the voting rights in the subsidiary company;
b. Beneficially entitled to at least 95% of any profits available for distribution to the ordinary shareholders of the subsidiary company;
c. Beneficially entitled to at least 95% of any assets of the subsidiary company available for distribution to its ordinary shareholders on a winding up.

2. The principal taxpayer cannot be a transparent subsidiary and must be the parent company of one or more transparent subsidiaries;

3. The principal taxpayer must be a company which is resident in Malta or a company which, although not resident in Malta, carries on any activity in Malta; and

4. The accounting year end of the subsidiary must have its accounting period beginning and ending on the same dates as the accounting period of the parent company, with exceptions in the case of newly incorporated companies and companies wound up during the year.

On joining a fiscal unit, the principal taxpayer shall be required, for each year, to prepare a consolidated balance sheet and a consolidated profit and loss account in terms of the Companies Act covering all the companies in the fiscal unit.

The chargeable income of the fiscal unit shall be computed as if such income was derived by the principal taxpayer and shall be chargeable to tax in the name of the taxpayer, thus excluding all transactions occurring between two or more companies forming part of the fiscal unit. Transactions between the members of the fiscal units relating to transfers of immovable property located in Malta or transfer of shares in a property company cannot be excluded.

It is possible for a company which is not resident in Malta to be part of a fiscal unit, yet that subsidiary’s profits will be deemed to be attributable to a permanent establishment situated outside of Malta of the principal taxpayer.

It is also worth noting that if a shareholder of a company within the fiscal unit is entitled to receive tax refunds in terms of Article 48(4) or 48(4A) of the Income Tax Management Act, the chargeable income of the fiscal unit shall be subject to tax at a net of refund rate.

Although the rules are published, clarifications on the implementation side are still required and we expect to have further clarity in due course.