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VAT Grouping in Malta - A practical scenario – Aida Cachia & Michael Borg

10 Feb 2020 10:34 | Deleted user
The Accountant – What's Next? – Winter 2020 (MIA Publication)
With the publication of the Maltese Value Added Tax (Registration as a Single Taxable Person) Regulations effective from 1 June 2018, two or more persons may choose to be registered as a single taxable person for Maltese VAT purposes (“VAT Grouping”). Within some months it was understood that numerous applications have been processed and accepted by the Commissioner for Revenue, enabling several businesses to reap the benefits of these Regulations. 
But what are the requirements for VAT Grouping and what additional matters one should be aware of? The following practical example answers both questions.  
A multinational group of companies (“the group”) operates primarily in the retail sector and has the following structure:

The main facts:
-        All holdings are 100% shareholding
-        TradeCo. is a taxable person that provides supplies globally including to the other 2 Maltese established companies;
-        HoldCo. is a non-taxable legal person;
-        Ins. CaptiveCo. is a taxable person acting as a captive insurance company for the group that is licensed as such with the MFSA.
Does the group satisfy the necessary requirements to apply for a VAT group in Malta?
 1. Prescribed licensing requirements
Ins. CaptiveCo. is licensed in terms of the Insurance Business Act
 2.  Two or more persons established in Malta
TradeCo, HoldCo and Ins. CaptiveCo should be established in Malta
 3. The applicants are bound to each other by:

a) financial links: any person/s to hold, directly/ indirectly, more than 90% of any two or more of a) voting rights; b) entitlement to profits available for distribution; c) entitlement to surplus assets on a winding-up
b) organisational links: proof of a shared management structure
This should be satisfied if the group companies have common directors or share a common management structure.
c) economic links: exists where a) activities of the applicants are of the same nature/fall within same industry; or b) the activities of the applicants are interdependent/complementary, or c) one member of the group carries out activities which are wholly or substantially to the benefit of anyone or more of the other members
This should be satisfied on the basis that the activities of the Maltese entities are carried out for the benefit of the greater group
4. Submission of all due VAT/income tax compliance filings and settlement of related dues
Maltese VAT implication of forming part of a VAT group on intra-group transactions:
Without a VAT group, Maltese VAT should be charged on intra-group transactions which result in unrecoverable VAT for Hold Co. and Ins. Captive Co. 
However, the three Maltese companies may opt to be registered as a VAT group. The group would undertake both taxable and exempt supplies and would, therefore, be obliged to register in terms of article 10 of the Maltese VAT Act. Any intra-group transactions will be outside the scope of VAT, thus, eliminating the previously unrecoverable VAT.
Furthermore, since input tax deductions would need to be undertaken on a group basis, they would likely differ from the aggregated VAT position of the separate companies.
Other considerations
  • Ideally an initial analysis is carried out to assess the VAT position of the group when compared to the aggregate VAT position of the same individual entities considered on a stand-alone basis.
  • The members of the VAT group are required to nominate a Group Reporting Entity (“GRE”) to exercise any and all rights and discharge any and all obligations arising to the VAT group. Any supply made by / to a member of a VAT group shall be treated, as a supply made by / to the GRE.  The GRE would also be obliged to undertake the VAT compliance obligations of the group.
  • HoldCo will need to apply for a temporary Maltese VAT number as all taxable persons included in a VAT group are required to be registered for VAT purposes in Malta prior to being allowed to join a VAT group.
  •  Other non-VAT implications should also be considered including updating invoice templates, reviewing VAT controls of the entities within the VAT group, the impact to the financial statements of being jointly and severely liable for VAT of a VAT group and the VAT reporting procedure as a group since transactions will still need to be reported on a standalone level.
  • A VAT group cannot be voluntarily cancelled prior to the lapse of 24 months from the formation of the VAT group.
The application of VAT grouping provides several benefits ranging from a reduced VAT cost to cash-flow advantages. However, one should also ensure that applying for a VAT-group does not create burdens that outweigh the benefits. The implications of a VAT group may vary drastically, depending on the fact pattern and circumstances, and should be analysed upfront on a case-by-case basis.

 Aida Cachia is a Manager in tax at PwC Malta and forms part of the PwC Malta VAT team. 

Michael Borg is a Senior Manager in tax at PwC Malta and forms part of the PwC Malta VAT team


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