Income Tax Consolidation For Maltese Companies

The Consolidated Group (Income Tax) Rules were introduced in Malta in 2019. These rules allow companies that are part of the same group to be treated as a 'fiscal unit' for income tax reporting purposes. Even companies located outside of Malta may form part of the Consolidated Group Rules, provided certain conditions are met. These rules aim to simplify income tax calculations and reporting for groups of companies, fostering efficiency and compliance.

1. Eligibility to Form Part of a Fiscal Unit:

- To join or form part of a fiscal unit, a company should have neither outstanding balances due nor any outstanding filings required under the Income Tax Acts, the Value Added Tax Act, and the Final Settlement System Rules.
- The income tax balance due by a company after the end of the period allocated for fiscal unit registration is not required to be settled before joining or forming part of a fiscal unit.
- For a company to join an existing fiscal unit, that fiscal unit must also have no overdue balances or penalties due to the Commissioner for Revenue (CfR).
- When a principal taxpayer elects for a 95% subsidiary to join or form part of the fiscal unit, and the subsidiary has already filed an income tax return for that year of assessment, the election takes effect from the following year of assessment.
- A company must be a 95% subsidiary of its parent company at the end of the year preceding the year of assessment in which the election to form the fiscal unit is made. Additionally, the companies must have coterminous accounting periods.
- Provisions of article 18(2) of the Income Tax Act apply mutatis mutandis.

2. Timeline:

- The principal taxpayer has a 6-month period to register a fiscal unit, starting from the day after the financial period end (but not before August 1 of the calendar year of the financial period end).
- For subsequent years of assessment, the principal taxpayer has a 6-month period to inform the CfR of any changes to the fiscal unit's composition.
- After the 6-month period, the principal taxpayer cannot add or remove subsidiary companies from the fiscal unit, except for removing existing transparent subsidiaries due to structural changes.
- Requests to remove transparent subsidiaries post the 6-month period should be made in writing to the CfR.

What are the benefits of forming a fiscal unit in 2024?

Forming a fiscal unit under the Consolidated Group (Income Tax) Rules in Malta offers several advantages for companies within the same group:

1. Simplified Tax Reporting:

- Companies within the fiscal unit are treated as a single entity for income tax purposes. This simplifies tax calculations and reporting, reducing administrative burden.

2. Offsetting Profits and Losses:

- Companies in the fiscal unit can offset profits and losses against each other. If one company has losses, these can be set off against the profits of other group members, potentially reducing the overall tax liability.

3. Group-Wide Tax Credits:

- Tax credits, such as imputation credits, can be shared among group members. This ensures efficient utilization of available tax benefits.

4. Consolidated Tax Payment:

- The principal taxpayer (usually the parent company) pays the income tax on behalf of the entire fiscal unit. This streamlines tax payments and avoids separate filings by each subsidiary.

5. Improved Cash Flow:

- By consolidating tax payments, companies can better manage their cash flow. The fiscal unit pays a single tax amount, which can be distributed internally among group members.

6. Enhanced Financial Planning:

- Companies can plan their financial strategies more effectively by considering the group's overall tax position. This allows for better decision-making and resource allocation.

7. Reduced Compliance Costs:

- Instead of individual tax returns for each subsidiary, the fiscal unit submits a single consolidated return. This reduces compliance costs and administrative efforts.

8. Flexibility in Group Structure:

- The rules allow for flexibility in group composition. Companies located outside Malta can also be part of the fiscal unit, subject to certain conditions.

The main benefit of choosing fiscal unity regards cash flow compared to the current regime of partial shareholder tax refunds after the distribution of taxed profits. Thanks to fiscal unity, the group has an identical effective tax rate without a time lag between the payment of the standard corporate income tax rate (35%) and the receipt of the shareholder refund at the level of the shareholder. This is because the new rules immediately reduce the tax due from the principal taxpayer to the lower effective tax rate. However, tax consolidation may also be useful within a local context as it is wider in scope than when tax trading losses are surrendered. Our accountants (Member of the Institute of Financial Services Practitioners in Malta) will provide you all information regarding corporate tax and incorporation in Malta under maltese companies act.