Background

On 5 October 2017, the Notional Interest Deduction Rules were published. The Notional Interest Deduction is a new tax incentive, which aims to approximate neutrality between debt and equity financing.

Eligible Undertakings

Malta resident companies/partnerships or Malta permanent establishments of non-resident companies/partnerships are entitled to a notional interest deduction (NID). Election for the NID is at the discretion of the undertaking.

Eligible Income

The NID can be set off against the total risk capital as at the end of the accounting period. The risk capital of the undertaking includes mainly share capital, share premium, loans and capital attributed to the permanent establishment.

How does it work?

The NID is computed by multiplying the deemed reference rate by the balance of risk capital that the undertaking has at year end. The reference rate is the risk-free rate set on Malta Government Stocks with a remaining term of approximately 20 years plus a 5% premium.

The NID claimed in any year is subject to a cap equal to 90% of the undertaking’s chargeable income (excluding any gross-up for FRFTC). However, if the NID exceeds 90% of the undertaking’s chargeable income, the excess is carried forward to be deducted against chargeable income derived in subsequent years.

Factors increasing the benefit of NID

When an undertaking claims a NID, the shareholder or partner is deemed to have received in that year an amount of interest income equivalent to the NID claimed by the undertaking for the relevant year of assessment.

Any dividend distribution made out of profits relieved from tax through a NID claim would not be chargeable to additional tax at the level of the shareholder.

Overall benefit

A Malta resident company/partnership or a Malta permanent establishment of non-resident company/partnership can take advantage of this new tax incentive taking into account the relevant anti-abuse provisions.