The chargeable income or gain of a person is the aggregate amount of remaining income or gain emanating from sources which are taxable according to Maltese law after allowing the exemptions and subtracting the allowable deductions. Losses may be allowed as a deduction against such chargeable income or gain consequently reducing the eventual tax liability.

Trading Losses

A loss is basically a negative profit incurred by a person solely or in partnership, in any trade, business profession or vocation. Losses are computed using the same computational rules used in computing profits. Article 14(1)(g) of the Income Tax Act specifically states that such loss must be computed as “if it had been a profit, would have been assessable under this act”. In the event that a person conducts an undertaking wherein had such undertaking produced a profit it would have been taxable in terms of Maltese law but instead such undertaking produces a loss that loss would be deductible from that person’s chargeable income.

A person may utilize trading losses incurred in an accounting period whereby chargeable income or gains may be reduced or completely offset with the consequence that no tax will be payable in the relevant year of assessment. Subject to certain limitations, such losses may be offset against other items of income for that period. If in a particular year of assessment there are not sufficient profits to absorb trading losses, such losses may be carried forward indefinitely against future trading income.

It is to be noted that when computing the loss incurred by the person, deductions of wear and tear and initial allowances are not allowed. Apart from these two deductions, all other deductions allowed under Article 14 of the Income Tax Act are allowed in computing a loss. Furthermore when a company is taxed on the ‘remittance basis’, and such company incurs a trading loss outside Malta, such loss cannot be ‘remitted to Malta’. The concept of the ‘remittance basis’ is only applicable to a remittance of profit.

Surrendering of Losses

The Income Tax Act provides for the possibility for one company within a group of companies to surrender and deduct such loss from the chargeable income of another claimant company within that group. In order to assess whether a loss may be surrendered from one company to another member of the same group of companies, there must be an examination of whether the company is considered a member of a group.

Conditions for Group Loss Relief

The surrendering of losses within a group of companies is subject to the following conditions:

In order for Group Loss Relief to apply both surrendering and claimant companies must form part of a “Group”. A Group is defined in the Income Tax Act wherein the following conditions must be fulfilled concurrently;
- More than 50% of its ordinary share capital and its voting rights are owned directly or indirectly by the parent company; and
- The parent company is directly or indirectly beneficially entitled to 50% of any distribution of profits to the ordinary shareholders of the subsidiary; and
- The parent company is directly or indirectly beneficially entitled to 50% of any assets available for distribution to the ordinary shareholders of the subsidiary upon a winding up.
Both the surrendering company and the claimant are resident in Malta. Group relief would not be applicable between dual-resident companies.
The claimant company must follow up a specific procedure to make a group claim to be able to subtract the losses surrendered by the surrendering member of the Group from its chargeable income. In this respect it is to be noted that a claim need not be for the full amount of loss and such loss may be split between different companies who in terms of Maltese law are considered members of the Group. However the claim for Group relief must be accompanied with the consent of the surrendering company, and must be made within twelve months following the end of the company’s accounting period which date falls within the year immediately preceding the year of assessment for which the claim is made.
Only the losses defined in Article 14(1)(g) may be surrendered between members of a Group.
A loss can only be surrendered once. In order for a loss to be surrendered between a parent and a subsidiary, the loss must be incurred in the same basic period and not unutilized losses brought forward from previous years of assessment. Therefore, the loss may not be re-surrendered by a claimant company to a third company within the Group. It is to be noted that a surrendering company may surrender losses in excess of the total income of the claimant company. In such case the claimant company may carry forward such excess unabsorbed losses as if they were its losses from its trading activities.
Subject to cases where a company is incorporated or wound up in the basis year, Group relief is only available between the surrendering member and the claimant member of the Group when both companies were members of the same Group throughout the whole year preceding the year of assessment for which the relief is claimed.
The claimant company may only deduct claimed losses which had they been profits would have been allocated to the immovable property or the Maltese taxed accounts from its corresponding immovable property or Maltese taxed account. Such claimed losses may be carried forward, however they may only be set off against the aforementioned taxed accounts.
The claimant company may only deduct claimed losses which had they been profits would have been allocated to the foreign taxed accounts from its corresponding foreign taxed account. Such claimed losses may be carried forward, however they may only be set off against the aforementioned taxed account

Anti-Avoidance Measures

Where a company is a member of a group of companies by reason of arrangements that either their sole or main purpose is to reduce any company’s tax liability, and by virtue of the said arrangements that company would cease to be a member of that group of companies, then that company will be treated as not being a member of that group of companies for any year preceding the year of assessment in which the year of assessment is in existence.

Unless proven otherwise, Group relief is also disallowed when losses incurred in the year in which the scheme was entered by the surrendering company where its sole purpose was to obtain the benefit of any loss, or the balance of any loss incurred by the company in any year preceding the year of assessment as to avoid liability on the part of that company or of any other person to the payment of tax.

Capital Losses

Capital gains listed in Article 5 of the Income Tax Act are brought to tax after deducting exemptions in Article 12 and any allowable deductions found in Articles 14 and 26. It is to be noted that the cardinal rule in this respect is that losses of a capital nature can be offset against capital gains and such losses can never be utilized against trading losses.

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