Malta

Two companies that for tax purposes are resident exclusively in Malta, where one company is a 50% plus subsidiary of the other or both are 50% plus subsidiaries of a third Malta-resident company, qualify as members of a group of companies. Allowable losses may be surrendered by a company to another company within the group where both companies have concurrent accounting periods and form part of such group throughout the entire basis year for which this relief is claimed.

Consolidated Group (Income Tax) Rules

In relation to accounting periods commencing in calendar year 2019 and subsequent years, there is the possibility of income tax consolidation in Malta.

Consequently, companies forming part of a group of companies (as defined) may elect to be treated as one single taxpayer (subject to the satisfaction of certain statutory conditions). This would be achieved by allowing a parent company to elect that its subsidiary/ies and itself will form a fiscal unit, resulting in the subsidiary/ies being treated as transparent.

As a result, upon successful registration, the parent company would be considered the ‘principal taxpayer’ of the fiscal unit, and the chargeable income of the members of the fiscal unit would be taxable solely in the hands of such principal taxpayer. Furthermore, transactions taking place between persons forming part of the fiscal unit (excluding transfers of immovable property situated in Malta subject to a final tax) are disregarded and fall outside the scope of Maltese income tax legislation.

The primary conditions to be satisfied for a successful registration are that:

• the parent company holds at least a 95% shareholding in the subsidiary, and
• the accounting period of the members of the fiscal unit starts and ends on the same date.

The Legal Notice also establishes other requirements that will need to be satisfied to establish a fiscal unit.

Transfer pricing

On 18 November 2022, Transfer Pricing Rules (‘the Rules‘) were introduced in Malta. 

Initially, the Rules will apply to basis years commencing on or after 1 January 2024, with respect to arrangements entered into on or after 1 January 2024, and any arrangements entered into prior to 1 January 2024 that are materially altered on or after that date. 

However, as from 01 January 2027, the Rules shall also apply to any arrangements entered into before 01 January 2024 and which were not materially altered after 01 January 2024. 

Micro, small and medium-sized enterprises (SMEs) are excluded from the scope of the Rules (i.e. those entities fulfilling the criteria laid down in Annex I of Commission Regulation (EU) No 651/2014). 

The Rules apply to cross-border arrangements entered into between associated enterprises. Any transactions between Maltese-resident entities are excluded from the scope of the Rules. Securitisation transactions are also excluded from the scope of the Rules. The Rules will also not apply where the aggregate arm’s length value of all items of income and expenditure of:

• A revenue nature forming part of cross-border arrangements does not exceed €6m; and
• A capital nature forming part of cross-border arrangements does not exceed €20m;

in the year preceding the year of assessment.

Bodies of persons that should be considered as associated enterprises for the purposes of the Rules include enterprises over which there is direct or indirect control through a holding of more than 75% of the voting rights or ordinary share capital, or alternatively, by virtue of any powers conferred by the articles of association or other document regulating the controlled body of persons. Bodies of persons subject to common control by virtue of the 75% threshold will also fall within the scope of the Rules.

Where bodies of persons are constituent entities of a multinational enterprise group, and thus subject to country-by-country reporting obligations, the percentage interest in the voting rights or the ordinary share capital will be of 50% (rather than 75%).

For the purpose of the Rules, cross-border arrangements should include the following arrangements:

• An arrangement between a Maltese-resident company and a non-Maltese-resident party;
• An arrangement between a Maltese-resident company and a permanent establishment situated outside Malta to which the arrangement is effectively connected; and  
• An arrangement between a company that maintains a permanent establishment in Malta to which the arrangement is effectively connected, or otherwise derives income or gains arising in Malta, and a non-Maltese resident party.

In terms of the Guidelines in relation to the Transfer Pricing Rules, issued by the Maltese Tax and Customs Administration (MTCA), the documentation that is required to be held by entities which fall within scope of such Rules, shall be in line with Chapter V of the OECD Transfer Pricing Guidelines (i.e. Master File and Local File). 

The Rules also set out a framework for the request and issuance of unilateral transfer pricing rulings and advance pricing agreements.

Country-by-country (CbC) reporting

The CbC reporting requirement applies to MNE Groups, being any group that includes two or more enterprises (including any PEs) the tax residence of which falls in two different jurisdictions, in respect of fiscal years starting on or after 1 January 2016. The Regulations apply for MNE Groups having a total consolidated group revenue of at least EUR 750 million (or an equivalent amount in local currency) during the fiscal year immediately preceding the reporting year.

Thin capitalisation

The Maltese tax regime does not contain thin capitalisation rules. However, reference should be made to the interest limitation rules set out under Interest expenses in the Deductions section.

Controlled foreign companies (CFCs)

As a result of the transposition of the ATAD into Maltese legislation, Malta introduced the concept of CFC legislation into Maltese tax law and such legislation became effective as of 1 January 2019. 

A CFC is defined in the Regulations as:

1. an entity in which a Maltese resident taxpayer, alone or together with its associated enterprises, holds a direct or indirect participation of more than 50% of the voting rights, or owns directly or indirectly more than 50% of the capital or is entitled to receive more than 50% of the profits of that entity, and
2. the actual corporate tax paid by the entity is lower than the difference between the tax that would have been charged on the entity under the Income Tax Acts and the actual foreign corporate tax paid.

A CFC also includes the PE situated outside Malta of a Maltese resident taxpayer where the condition set out in paragraph (ii) applies.

Where an entity/PE is considered to be a CFC, the Regulations require the non-distributed income of the CFC arising from non-genuine arrangements that have been put in place for the essential purpose of obtaining a tax advantage to be included in the tax base of the Maltese resident entity.

The Regulations (in line with the ATAD) provide that an arrangement or a series thereof are to be regarded as non-genuine to the extent that the entity or PE would not own the assets or would not have undertaken the risks that generate all, or part of, its income if it were not controlled by a company where the significant people functions, which are relevant to those assets and risks, are carried out in Malta and are instrumental in generating the controlled company's income.

The Regulations also provide for the manner and amount of CFC profit to be included in the tax base of the Malta resident entity.

CFCs whose profits fall within certain minimum thresholds are excluded from the application of this regulation.