New Malta regulations implementing VAT Grouping

On 22 May 2018, the eagerly anticipated regulations implementing VAT Grouping in Malta were published as Legal Notice 162 of 2018 – Value Added Tax (Registration as a Single Taxable Person) Regulations, 2018. This Tax Alert outlines the salient features of these regulations, which enter into force as of 1 June 2018.

Why opt for VAT Grouping?

VAT Grouping is a tool, available in various EU Member States, which is used extensively to prevent the cascading of irrecoverable VAT on charges made between members of the VAT Group. In Malta, the option to set up a VAT Group is available where at least one of the applicants is licensed/recognised by the Malta Financial Services Authority (MFSA) or the Malta Gaming Authority (MGA). A key benefit of VAT Grouping is that supplies between group members are disregarded for VAT purposes, thereby enabling operators to outsource internally (potentially also from establishments outside of Malta e.g. overseas head office) without incurring irrecoverable VAT.

Eligibility criteria

Two or more persons (defined as legal persons and excluding physical persons) which are established in Malta for VAT purposes are eligible to apply to the Commissioner for Revenue to be registered as a single taxable person (i.e. a ‘VAT Group’), subject to the fulfilment of the following conditions:

• At least one of the applicants must be a taxable person licensed or recognised by the MFSA or the MGA in terms of the specified legislation.
• Each applicant must be bound to each of the others by financial links, economic links and organisational links:
• A financial link shall be deemed to exist where the same person/s (being a legal person or an individual) hold/s, directly or indirectly, more that 90% of any two or more of the following: a) voting rights/equivalent interests; b) entitlement to profits available for distribution; c) entitlement to surplus assets available for distribution on a winding up/equivalent event.
• An organisational link shall be deemed to exist where the applicants have a shared management structure, wholly or in part.

• An economic link shall be deemed to exist where:

(a)  the activity of each of the applicants is of the same nature or falls within the same industry; or

(b)  the activities of the applicants are complementary or interdependent; or

(c)   one member of the VAT Group carries out activities which are wholly or substantially to the benefit of any one or more of the other members.

• At the time of application, all applicants must be up-to-date with their VAT and income tax filings, and must have settled all related dues.

Persons forming part of a VAT Group are not eligible to join another VAT Group, and persons bound to each other by financial links, organisational links and economic links may only form part of the same VAT Group.

Principal effects

A VAT Group is allocated a single VAT identification number, and any pre-existing individual VAT identification numbers of the members are de-activated. The members of the VAT Group are expected to nominate a Group Reporting Entity to act as representative and to exercise all rights and discharge all obligations of the VAT Group. This notwithstanding, each member of the VAT Group shall be jointly and severally liable for the payment of VAT (including any related interest and administrative penalties) due and payable by the Group Reporting Entity.

Any supply of goods or services made by one member of a VAT Group to another member of that VAT Group is generally disregarded for VAT purposes, thereby enabling members to outsource functions internally within the VAT Group without triggering adverse VAT cashflow implications as well as potentially irrecoverable VAT costs. In this regard, it is particularly interesting to note that overseas entities having an establishment (e.g. branch) in Malta for VAT purposes are in principle also eligible to join a VAT Group.

Futhermore, supplies made by any of the members of the VAT Group to persons outside the VAT Group are deemed to be carried out by the Group Reporting Entity. In turn, the VAT classification of these supplies impacts the input VAT recoverability position of the Group Reporting Entity and hence of the VAT Group as a whole.

Next steps

We recommend that groups having operations in the regulated financial services, insurance and gaming sectors assess their eligibility to apply VAT Grouping as well as the potential VAT benefits and other consequences of registering as a VAT Group. This assessment, which Deloitte is able to undertake on your behalf, will enable the group to make a properly informed decision as to whether to opt to form a VAT Group. Deloitte is also able to advise and assist groups throughout the entire VAT Group registration and ongoing compliance cycle.