Malta: Notional interest deduction rules

December 14 2017

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.