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.
Malta does not operate a sophisticated transfer pricing regime. However, an enabling provision in the Income Tax Act has been introduced which empowers the Minister of Finance to enact rules in relation to transfer pricing. More developments in this respect are expected in the near future. The Maltese Revenue issued draft Transfer Pricing Rules for public consultation in December 2021, which consultation period closed on 28 February 2022.
Apart from this, there are some general anti-avoidance provisions and brief references to transactions at arm’s length. In practice, the Maltese tax authorities will typically still consider it desirable that transactions between residents and non-residents broadly adhere to the arm's-length principle, that is, prices that would have been concluded between independent enterprises. However, no specific rules are available on the manner in which an arm's-length price is to be established.
Furthermore, the new ATAD provisions introduced in Maltese tax law re-emphasise the general anti-abuse rule (GAAR) already existent in Maltese tax legislation previous to the transposition of the ATAD into local legislation. In this regard, the Regulations provide that for the purposes of calculating the tax liability of a taxpayer, an arrangement or a series of arrangements can be ignored where it has been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law and are not genuine having regard to all relevant facts and circumstances. An arrangement or a series thereof can be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons that reflect economic reality.
Country-by-country (CbC) reporting
The CbC reporting requirement applies to Multinational Enterprise Groups (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.
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 is effective as of 1 January 2019.
A CFC is defined in the Regulations as:
- 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
- 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.