Malta has very recently introduced the concept of a notional interest deduction (NID).  The recently published rules come into effect from year of assessment 2018 (basis year 2017) and they are aimed at mitigating the differences in the tax treatment between equity and debt financing.  Before the introduction of these rules, debt financed entities could claim a tax deduction equivalent to the interest however no similar deduction was available for equity financed companies.  These new rules entitle companies with an option to claim a tax deduction equivalent to the notional interest calculated on its equity thus making equity financing on the same level playing field as debt financing for taxation purposes.

Salient features of these rules:

  • NID is optional and may only be claimed if all shareholders of an undertaking approve the claim for such a deduction.
  • These rules are applicable to Malta registered companies, permanent establishments situated in Malta as well as partnerships.
  • NID is determined by multiplying the reference rate by the invested risk capital.  The reference rate is the risk-free rate set by reference to the current yield to maturity on the Malta Government Stocks with a remaining term of approximately 20 years plus a premium of 5%, and the invested risk capital of the undertaking is the share capital, share premium, positive retained earnings, non-interest bearing loans an any contributions made by the shareholder/s.  Any capital directly employed in the production of income which is exempt from tax does not fall part of the invested risk capital.
  • NID is limited to 90% of chargeable income.  Any excess above the capped amount may be carried forward for deduction in future years.
  • When an undertaking claims NID, the shareholder / partner is deemed to have received income equal to the NID and the provisions relating to the taxation of interest income shall apply with the option to apply NID against the deemed interest brought to charge.
  • An amount equal to 110% of the profits relieved from tax through the NID shall be allocated to the undertaking’s final tax account.  The amount allocated to the final tax account is limited to the total profits of the undertaking an any such excess shall be ignored for allocation of tax profits.

Undertakings are advised to seek for professional tax advice in determining whether these rules would result in the most optimal scenario for the said undertaking and shareholders / partners.

 

Update to the NID news item

The NID must be calculated before taking into account any adjustments for the Flat Rate Foreign Tax Credit (FRFTC).  This clarification was embedded in Act VII of 2018 and is applicable from year of assessment 2018.