VAT Grouping

  • By:Melissa Speigner
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Subject to specific conditions, two or more legal persons established in Malta may now apply to be registered as a single taxable person for the purposes of the VAT Act (VAT Group). Once successfully registered, transactions taking place between persons who form part of the VAT group will fall outside the scope of VAT. This is a welcome development particularly for regulated service providers in the gaming and financial services industries who are typically exempt without credit as adoption of a VAT Group could, besides creating cash flow efficiencies, help eliminate self-induced irrecoverable VAT between group entities.

Following accession into the EU in 2004, Malta had initially opted not to implement the VAT grouping provisions provided for in Article 11 of the EU VAT directive. This option provides the possibility for a Member State to treat two or more persons who are closely bound to one another by financial, economic and organisational links, as a single taxable person for VAT purposes.

A change of policy was announced in the 2018 Government Budget Speech. This was followed by subsidiary legislation to the Maltese Value Added Tax (VAT) Act contained in Legal Notice 162 of 2018 – Value Added Tax (Registration as a Single Taxable Person) regulations, 2018, which introduced the possibility of VAT Grouping as of 1 June 2018.

To form a VAT Group, the following conditions must be satisfied:

  • All members of the VAT Group must be legal persons established in Malta;
  • Members of the VAT Group must be financially, organisationally and economically linked to each other. A financial link exists when two or more entities are directly or indirectly held by at least 90% by the same person or persons. The financial link may be established on the basis of voting rights, profit entitlement or access to winding up distributions. An organisational link exists when two or more entities share their management structure whilst an economic link exists when entities are linked to each other by fact that they operate in the same industry, or provide services which are interdependent or complementary to each other. An economic link also exists when group members carry out activities which are wholly or substantially carried out for the benefit of the other Group Members.
  • At least one of the members of the VAT Group is a taxable person licenced or regulated under any of the following Acts:
    • The Banking Act;
    • The Financial Institutions Act;
    • The Gaming Act;
    • The Insurance Business Act;
    • The Insurance intermediaries Act;
    • The Investment Services Act;
    • The Lotteries and Other Games Act;
    • The Retirement Pensions Act;
    • The Securitisation Act.
  • All Members of the VAT Group are up to date with their VAT filing requirements and VAT payments.

Members of a VAT Group may only form part of one VAT Group. Approval must be obtained from the VAT Department and such approval may be done by any member. An application may also be made by a person to join a VAT Group already in existence.

Members within a VAT Group are required to nominate a Group Reporting Entity. This entity will be responsible for fulfilling all the obligations arising under current regulations although members of the VAT Group are jointly and severally liable for the payment of VAT dues of the VAT Group as a whole.   Once an entity forms part of the VAT Group, any supply made or received by the members are deemed to have been received or supplied by the Group Reporting Entity and therefore must be reported as such.  The VAT status of members within the group (whether taxable persons or non-taxable legal persons) becomes irrelevant as the VAT Group itself is regarded as a taxable person.

What are the benefits of VAT Grouping?

  • The key benefit is a material simplification of group compliance requirements, translating into a reduction in administrative and compliance costs for both tax authorities and businesses, since only one VAT return for the VAT group will be submitted.
  • Being part of a VAT Group can also provide VAT cash flow advantages because the input VAT claims attributable to certain members of the group are credited against the output VAT debts of other members, which in turn reduces the amount of VAT refunds and related administration for the tax authorities.
  • Most notably, the creation of a VAT Group would help eliminate self-induced irrecoverable VAT between group entities where at least one entity is engaged in one of the financial services or gaming industries regulated under once of the Acts listed above.

 

If you are interested and would like to discuss VAT Grouping in further detail, please reach out to us through our ‘Contact Us’ page.

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