Malta introduces Notional Interest Deduction

Chetcuti Cauchi co-authored with Wojciech Gadzala | Published on 25 Oct 2017

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Malta introduces Notional Interest Deduction

With effect from year of assessment 2018, Malta companies and partnerships (as well as Malta permanent establishments of non-resident entities) may claim a deduction for “interest on risk capital.” 

Read our updated publication on Malta Notional Interest Deduction 2018.

By virtue of a Legal Notice No 262 of 2017 (published on 5 October 2017) Malta introduced a Notional Interest Deduction (“NID”) mechanism.

Notional Interest Deduction (NID)

The new rules are intended to bring about neutrality between debt and equity financing of Malta resident entities as well as permanent establishments of non-resident entities to the extent that risk capital is attributable to such permanent establshment. From a tax perspective, debt financing has typically been preferred over equity contributions, as interest payments may be deducted against chargeable income, whereas dividend payments arising from an equity stake are not deductible. The new rules aim at aligning the tax treatment of of using either of these financing methods.

In order to achieve that, starting from year of assessment 2018 Malta resident companies and partnerships will be able to claim a deduction against their chargeable income of amounts deemed to be payable as interest on their “risk capital”. The term "risk capital" is defined, inter alia, as share or partnership capital, share premium, positive retained earnings, as well as zero interest loans. The deduction is optional and subject to the approval of shareholders.

Notional Interest Deduction: Calculation

The available deduction is to be calculated by multiplying the company's risk capital at year end by the NID reference rate (equal to the risk free interest rate identified as current yield to maturity on Malta Government Stocks with a remaining term of approximately 20 years plus a premium of 5%). The maximum deduction in any given year cannot exceed 90% of the entity’s chargeable income, but the balance of NID over that threshold can be carried forward.

Where a Malta entity claims the NID, it shall be deemed that its partners / shareholders have received interest income in proportion to the nominal value of risk capital held by them. Shareholders in receipt of dividends out of the profits which have been relieved from tax through a NID claim would not be subject to further tax on such receipt.

The new rules also contain anti-abuse rules that are aimed at preventing taxpayers from obtaining undue advantages contrary to the object and purpose of the rules. 

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Dr Jean-Philippe Chetcuti

Senior Partner, Tax & Immigration

+356 22056111

Dr Priscilla Mifsud Parker

Senior Partner, Corporate, Tax & Immigration

+356 22056122

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