Legal Notice 110 of 2019 introduced the concept of a consolidated income tax return for related entities into Maltese tax law through the Consolidated Group (Income Tax) Rules (CGR). The rules, which are optional, are first applicable from year of assessment 2020/2021 where the fiscal unit has an accounting period commencing in calendar year 2019.
This article explains the main provisions of the CGR and with a view to guiding ATX-MLA candidates in respect of the examining team’s expectations on the topic. The CGR is included in the ATX-MLA syllabus and is examinable in full, from June 2020 onwards, with three exceptions which are explicitly excluded, as indicated within this article:
A parent company holding shares in another company, can make an election to file a single consolidated tax return for itself and its controlled subsidiary or subsidiaries as applicable, referred to as a ‘fiscal unit’. Such a consolidated tax return will bring to charge all profits and losses of the fiscal unit as one taxable person. Any subsidiaries included in the fiscal unit are referred to as ‘transparent’ for CGR purposes.
The formation of a fiscal unit is possible so long as at least two of the following three conditions are satisfied:
Where a subsidiary is not fully owned by the parent company, the consent of the minority shareholders (representing 5% or less of the total issued shares) is also required in order for the subsidiary to form part of the fiscal unit of its parent company.
In order for a subsidiary to form part of the same fiscal unit of its parent company, the subsidiary company must have its accounting period beginning and ending on the same dates as the accounting period of the parent company in all the years in which it forms part of the fiscal unit. However newly incorporated companies would still be eligible to form part of a fiscal unit provided that the accounting period end date of the subsidiary is the same as that of the parent company. Similarly, companies wound up during the fiscal year would also be eligible to form part of the fiscal unit provided that the accounting period beginning date of the subsidiary is the same as that of the parent company.
Any election made by the parent company shall become effective from the year of assessment in which it is made, and where such election is made after the date by which the subsidiary is due to file an income tax return for that year of assessment, such an election will be effective from the following year of assessment.
Where a parent company has made an election to form a fiscal unit with respect to its subsidiary, and the subsidiary is in turn the parent company of one of more transparent subsidiaries, the latter transparent subsidiaries would also form part of the fiscal unit together with their parent company. It is not possible for a company to form part of more than one fiscal unit at any one time.
The principal taxpayer shall assume all the rights, duties and obligations relative to that fiscal unit as a group.
Whenever a subsidiary joins a fiscal unit by virtue of the election made by the parent company, the following balances of the subsidiary existing at the end of the previous tax period shall be considered to be a balance of the principal taxpayer of the fiscal unit as follows:
Where the subsidiary is not 100% owned by the parent, the consent of the minority shareholders is also required with respect to the takeover of the balances referred to above. Should such consent not be granted, the above balances will be retained by the subsidiary, kept in abeyance, and not taken into account for as long as the subsidiary remains in the fiscal unit, after which, such balances would then be available to the subsidiary without any reduction or limitation.
However, either all balances of a transparent subsidiary (which is not a 100% subsidiary) are transferred to the principal taxpayer, or all balances of the said subsidiary are kept in abeyance (ie there can be no mix of balances partly kept in abeyance and partly transferred). A different decision may be adopted for different transparent subsidiaries.
Notwithstanding the above, any unabsorbed notional interest deduction (NID) balance existing at the end of the basis year preceding that with regard to which the election for the subsidiary (irrespective of whether the subsidiary is a 95% subsidiary, or a 100% subsidiary) to join the fiscal unit becomes effective, should be kept in abeyance upon joining or commencing to form part of the fiscal unit. However, any unabsorbed NID balance existing at the level of the principal taxpayer may continue to be carried forward and claimed in accordance with the NID rules.
The CGR provide that the principal taxpayer may make a payment to a transparent subsidiary with respect to the transfer of the above-mentioned balances from the transparent subsidiary, but such payment cannot exceed the amount of such loss, deduction or allowance. Such a payment shall not be taxable in the hands of the recipient company and neither shall it be tax deductible for the payor.
The CGR, permit a company that is not resident in Malta to form part of a fiscal unit and possibly also act as a principal taxpayer, provided that such company falls within the definition of a company registered in Malta.
However, for the purpose of ATX-MLA, the examinable scope shall be limited to scenarios where the principal taxpayer and all subsidiaries are tax resident in Malta. However, the tax implications of a fiscal unit deriving income from a permanent establishment outside of Malta is examinable.
The election to form a fiscal unit can be revoked in such form and under conditions as the Commissioner for Revenue may impose, according to the circumstances of the fiscal unit and members thereof.
The rules, however, make provision for the possibility of a company leaving a fiscal unit. In this respect a transparent subsidiary is deemed not to form part of the fiscal unit where:
Where the company leaving the fiscal unit (referred to in the CGR as the exiting company), is also a parent company of one or more transparent subsidiaries, the exiting company and all its transparent subsidiaries will be considered to form a new separate fiscal unit, with the exiting company deemed to be the principal taxpayer with effect from the start of the basis year in which the exiting company no longer forms part of the old fiscal unit. An exception to this sub-rule would be where the exiting company becomes a 95% subsidiary of another company (new parent company) and such new parent company makes an election in respect of the exiting company, such that the exiting company would thus form part of the fiscal unit of the new parent company.
Where a company exits a fiscal unit or where a fiscal unit ceases to exist, the following rules will apply:
(i) the balances listed below shall continue to pertain to the principal taxpayer:
(ii) the cost of any assets owned by the exiting company, or the resulting new fiscal unit, shall be deductible from the cost of the assets attributable to the principal taxpayer of the old fiscal unit. Where such assets include assets on which deductions for wear and tear allowances have already been claimed by the old fiscal unit, such deductions will continue to be claimed by the exiting company or new fiscal unit, as applicable.
(iii) upon any subsequent transfer of assets mentioned in (ii) above, a balancing statement would need to be prepared and it shall be deemed that:
It is the aim of the examining team to assess the exit of a transparent subsidiary from a fiscal unit through the application of knowledge to a given scenario. Candidates will usually be expected to present their answers in the form of explanation (as opposed to computation) demonstrating that they are aware of the implications of such an exit.
The CGR provide that when calculating the chargeable income of the fiscal unit that is to be brought to tax, such chargeable income shall be computed as if the income was derived by the principal taxpayer and shall be charged to tax at the relevant tax rate.
The chargeable income of the fiscal unit shall be computed on the basis of the following rules:
a) Any transactions taking place between companies forming part of the fiscal unit (referred to as ‘ignored transactions’) are considered not to have occurred, other than the following transactions:
b) All income and expenses derived by a transparent subsidiary is considered to have been derived by the principal taxpayer.
c) Any expense that would have been deductible against income which is treated as an ignored transaction is allowable as a deduction against income attributable to the principal taxpayer, provided that the corresponding expense (which is considered as an ignored transaction in the fiscal unit) would have been allowable as a deduction in the transparent entity if the companies had not formed a fiscal unit. In this respect, it shall be deemed that activities or transactions carried on by any person comprised within the fiscal unit are carried out by the principal taxpayer.
d) Any industrial building, structure or plant and machinery used or employed by a transparent subsidiary is considered to be used or employed by the principal taxpayer.
e) No balancing statement is required to be prepared with respect to the transfer of assets between companies within the same fiscal unit, and deductions in respect of such wear and tear of the assets shall continue as if the transfer did not occur.
f) A balancing statement is required to be prepared by the principal taxpayer with respect to the transfer of assets outside the fiscal unit, and in this respect:
g) Any interest held by the transparent subsidiary in any bodies of persons not forming part of the fiscal unit shall be deemed to be held directly by the principal taxpayer.
h) The rules also regulate the tax implications if the parent or the transparent subsidiaries are subject to tax in Malta on a remittance basis. Such specific rules are excluded from the scope of ATX-MLA.
i) Where the NID is claimed and the principal taxpayer is resident in Malta, the risk capital will be calculated with reference to the consolidated balance sheet.
j) Any foreign tax suffered by any transparent subsidiary shall be deemed to have been incurred by the principal taxpayer.
k) In terms of the tax accounting rules, the principal taxpayer will be required to allocate the profits derived by the transparent subsidiaries but attributable to it, to the same tax accounts as though it had derived these profits directly.
l) The investment income provisions shall not apply to payments of investment income where the recipient and the payor are companies forming part of the same fiscal unit.
Where a company forming part of the fiscal unit is entitled to a tax refund upon the distribution of a dividend in terms of Article 48(4) or 48(4A) of the ITMA, Chapter 372 of the Laws of Malta, the tax rate of the principal taxpayer will be reduced by the rate resulting from dividing the tax refunds receivable, by the chargeable income of the fiscal unit. In a simplistic scenario, where all income of the fiscal unit is subject to tax at 35% and a tax refund of 6/7 of the company tax (30%) is due to the parent company upon the distribution of profits by the transparent subsidiaries, the fiscal unit’s tax rate of 35% will be reduced by the tax refund rate of 30%, resulting in the fiscal unit being subject to tax at the rate of 5%.
Every principal taxpayer is obliged to prepare a consolidated balance sheet and consolidated profit and loss account combining the results of all companies included in the fiscal unit. Such consolidated accounts must comply with the provisions of the Companies Act, Chapter 386 of the Laws of Malta and be audited by a certified public auditor. With respect to the stand-alone financial statements for companies included in the fiscal unit, these are exempt (for tax purposes) from the requirement to be audited.
The principal taxpayer shall also be responsible for filing the tax return of the fiscal unit. All other companies within the fiscal unit will be exempt from the filing of tax returns.
All the members of the fiscal unit will be jointly and severally liable for the payment of tax, additional tax and/or interest due by the fiscal unit. The rules provide for an optional tax apportionment mechanism to take into account instances where the transparent subsidiary is not wholly owned by the principal taxpayer.
Rule 13 provides for a detailed anti-abuse rule intended to prevent the utilisation of the fiscal unit as a means to derive an unintended tax advantage.
However, for the purpose of ATX-MLA, the examinable scope shall exclude the application of the above-mentioned anti-abuse rule.
It is the aim of the examining team to assess candidates’ knowledge of the CGR through application of knowledge to a given scenario. Candidates will usually be expected to present their answers in the form of explanation with supporting calculations.
In this respect, it is the examining teams’ recommendation for candidates to refer to question 1 of the September (June) and December 2020 ATX-MLA exams for examples of the examining teams’ approach to assessing this topic. Candidates should also refer to the example in section (xv) of the Commissioner for Revenue’s Guidelines in relation to the Consolidated Group (Income Tax) Rules.
Written by a member of the ATX-MLA examining team
(1). For the purposes of Article 48(4) and (4A) of the Income Tax Management Act (ITMA), any dividend distributed from pre-tax consolidated profits shall be deemed to be made from the transparent subsidiary’s tax account balances existing at the end of the basis year preceding that with regard to which the election for the transparent subsidiary to join the fiscal unit becomes effective. On such distributions, there is a right to claim a tax refund in terms of Article 48(4) and (4A) of the ITMA, as applicable, through the filing of a claim for tax refund.