Inland Revenue's Guidelines on Profit Participating Loans

Trudy Marie Attard | Published on 19 Jul 2011

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The Malta Inland Revenue Department has issued a guideline endorsing the approval by ECOFIN of a recommendation concerning Profit Participating Loans (PPLs) put forward by the EU Code of Conduct Group.  The recommendaton clarified the tax treatment of hybrid loans i.e. loans which are both a debt claim and having voting rights or a right to the profits and suggested that whilst a hybrid loan is a financial instrument having both debt and equity characteristics, where payments under a hybrid loan arrangement qualify as tax deductible expense for the debtor, such payments should not benefit from a participation exemption granted to qualifying dividend distributions in the hands of the recipient.

In connection with this endorsement, the Commissioner of Inland Revenue has issued a guideline  which clarifies the position vis-à-vis PPLs which states that interest is chargeable to tax under the provisions of Article 4(1)(c) of the Income Tax Act. Interest received from sources situated outside Malta is taxable in Malta and does not benefit from an exemption related to income from participating holdings under the Income Tax Act or under any other law. By virtue of the guideline it is  clarified that income from a loan, including a loan that has characteristics of both debt and equity shall be considered to be interest for the purposes of Article 4(1)(c) of the Income Tax Act and is not considered to be income from share capital or from an equity holding for the purposes of the Income Tax Act.

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