Following Legal Notice 110 of 2019, Malta has brought in fiscal unity regulations. These allow companies to form groups in order to settle Income Tax as a unified entity. Meaning that a parent company may choose to form part of a fiscal unit with one or more of its subsidiaries, effectively rendering them as Transparent Entities and paying Income Tax as a single taxpayer. This is of course, subject to a specific set of rules and regulations, some of which are not as straightforward as one would like, which is why we are taking a simple but in-depth look into Fiscal Consolidation in Malta.
What is fiscal consolidation?
Fiscal consolidation is a means by which subsidiaries belonging to the same parent company are now able to consolidate and settle their income tax as one entity. Once a parent company elects to form a single Fiscal Unit with some or all of its subsidiaries, these subsidiaries become known as Transparent Entities. Meaning all income and gains declared by them is directly allocated to the Parent Company, also called the Principal Taxpayer and the Income Tax is settled from a single entity. This is different from the group relief provisions found in the Income Tax Act, that allow tax losses to be surrendered to other entities within the same group. These recent fiscal unity regulations give the possibility for a consolidated tax group.
Furthermore, the definition of a group under these regulations is not as narrow as provided for under the group relief provisions under the Income Tax Act. This grants both Maltese resident and non-Maltese resident companies to form part of a consolidated tax group, provided that they fall within the definition of a company. Foreign companies that intend on becoming part of a Fiscal Unit in Malta do not need to be Maltese tax resident, but they must be tax registered in Malta to be considered as a company registered in Malta for tax purposes. It is also worth noting that even certain trust arrangements and foundations can form part of a consolidated tax group, subject to certain conditions and elections as provided for by the Income Tax Act. That said, securitisation vehicles, finance leasing companies and foundations elected to be taxed under the provisions of the Act applicable to trusts are excluded from the Fiscal Unit eligibility.
How does tax consolidation work within the fiscal remit?
The same as applicable in accounting consolidation, transactions taking place between the entities within the Fiscal Unit are disregarded and fall outside scope of Maltese income tax legislation, excluding transfer of immovable property situated in Malta subject to Article 5A of the Income Tax Act and transfer of property companies.
When calculating the tax liability of the Fiscal Unit, should the shareholder of the principal taxpayer be registered for Maltese income tax refund purposes, the Rules allow the Fiscal Unit to apply at its level a rate of income tax. This results from the offset of the refund due to the shareholders against the income tax due by the company. Therefore, achieving a tax-efficient result without the need to distribute a dividend.
What are the requirements for Fiscal Units in Malta?
There is of course a set of specific requirements that entities shall follow should they wish to create a Fiscal Unit. The parent company referred to as the Principal Taxpayer may make an election in order for itself and its subsidiaries to form a single Fiscal Unit. In order to the achieve this, the following conditions need to be satisfied;
- The parent company must hold at least 95% shareholding in its one or more subsidiaries respectively.
- The accounting period of the members of the Fiscal Unit needs to start and end on the same date.
- An entity cannot form part of more than 1 Fiscal Unit at the same time.
As per the set rules, a foreign registered company that wishes to form part of a Fiscal Unit as well as act as the Principal Taxpayer, the company must fit within the definition of “a company registered in Malta”. For the foreign entity to satisfy such a definition, it would need to appoint a fiscal representative in Malta. Moreover, any company that is not resident in Malta and has registered to form part of a Fiscal Unit registered in Malta, would also need to register with the CfR, so it can be granted a Maltese income tax registration number before being registered as part of the Fiscal Unit. Finally, whenever the Principal Taxpayer does not hold 100% of the shares in the subsidiary then it must get the approval from the minority shareholder/s for the subsidiary to join the Fiscal Unit and thus become transparent.
Benefits of tax consolidation for your business
1. Cash flow advantage
Other than the compliance costs in applying for tax refunds, the main benefit of fiscal unity is the cash flow advantage. From a cash flow perspective, for refunds to be applicable, the distributing company would have to distribute a refund to its shareholder/s. The shareholders would only be able to claim a refund if the distribution would pay its corporate tax rate in full, at the flat rate of 35%. Under fiscal unity, the tax liability would be reduced from 35%, to 5% in most cases, hence saving 30% taxes in cash flow.
2. Reduction in tax
These new tax consolidation rules shall decrease the amount of tax due without having to submit a refund claim, wait for the income tax refund on distributed taxed profits.
3. Fiscal unity offers a wider scope
Fiscal unity differs from the VAT Grouping Rules, in that they have a wider scope of application and are not restricted to a particular sector or industry, such as banking and gaming. Tax consolidation can also prove useful from a local point of view, as it provides for unabsorbed tax losses and capital allowances (including balancing allowances) and unutilised tax credits to be surrendered and taken over by the principal taxpayer.
4. No compliance nightmares
Even though consolidated accounts are to still be prepared prior to the preparation and submission of the Fiscal Unit tax return, only one tax return is to be submitted as opposed to several refund claims. This will further reduce the tax compliance burden considerably, especially when the fiscal unit contains more than two entities.
Fiscal Consolidation FAQs
How is foreign income treated under the fiscal unit?
Foreign income under a fiscal unit will be treated no different than that to a standalone taxpayer. The only difference is that such income, like any other income, shall be considered as incurred by the principal taxpayer and double taxation relief will apply accordingly.
Who is responsible for filing the tax return of the fiscal unit?
The principal taxpayer is responsible for filing the tax return for the applicable year of assessment since the principal taxpayer assumes rights, duties and obligations under the Income Tax Act for all entities within the fiscal unity.
How long does it take to register the fiscal unit?
The registration for fiscal unity is not a complex process since it only requires the service provider to be a tax representative of all entities within the fiscal unit. Any taxes due by each member of the fiscal unit shall be NIL, hence all tax liabilities settled. This includes Income Tax, VAT as well as FSS.
Tax Liability
Even though the responsibility of filing the income tax return of the fiscal unit lies with the principal tax payer, the payment of tax and any interest or penalties to be accrued shall be jointly and severally liable by each member within the fiscal unit.
