The Maltese notional interest deduction rules (the rules)
were published on October 5 2017, further to an announcement
made in the previous 2017 budget. Traditionally, debt financing
in Malta has been regarded as more efficient from a tax
perspective due to the deductibility against chargeable income
of finance costs incurred by companies upon the granting of
loans. The main objective of the rules is to approximate the
manner in which cost of equity and cost of debt are treated
from a tax perspective. The rules provide certain undertakings
with the possibility of deducting interest they are deemed to
have incurred on equity.
Effective from year of assessment 2018, companies and
partnerships resident in Malta, or permanent establishments in
Malta of a non-Maltese resident undertaking may elect to avail
of the rules.
The notional interest deduction (NID) is calculated by
multiplying:
a) The deemed NID, which is the risk-free
rate set by reference to the current yield to maturity on Malta
government stocks with a remaining term of approximately 20
years, plus a 5% premium; and
b) The risk capital of the undertaking at the
end of the relevant financial year, which includes
share/partnership capital, share premium, positive retained
earnings, interest-free loans, any other reserves resulting
from a contribution to the undertaking, and any other item that
is shown as equity in the undertaking's financial
statements.
The rules prescribe that shareholders or partners of an
undertaking that has claimed NID will be deemed to have
received an amount of income equal to the interest on risk
capital from that undertaking. Where the undertaking has more
than one shareholder or partner, each shareholder or partner
will be deemed to have received an amount of deemed income that
is proportionate to the nominal value of the risk capital
pertaining to that particular shareholder or partner.
The maximum amount of NID that can be claimed in a financial
year is set at 90% of the undertaking's chargeable income,
although it will be possible for an undertaking to carry
forward any excess. Any remaining chargeable income will be
subject to Maltese income tax at the standard rates. Where a
shareholder or partner of the undertaking is not resident in
Malta, the deemed interest should be exempt from tax in Malta
provided certain conditions are satisfied.
It is pertinent to note that dividend distributions made out
of profits in respect of which the NID was availed will not be
chargeable to any further tax at shareholder or partner level.
Moreover, the rules also include anti-avoidance provisions in
order to curb potential abuse use of the NID system.
Mark Galea Salomone (mark.galeasalomone@camilleripreziosi.com)
and Donald Vella (donald.vella@camilleripreziosi.com)
Camilleri Preziosi
Tel: +356 21238989
Website: www.camilleripreziosi.com