Introduction

Via the 2018 Budget Laws, the Maltese Government seeks to introduce new rules regarding deductions of notional interest on risk capital. The aim of the
Notional Interest Deduction (NID) is to achieve neutrality between debt and
equity financing. Such rules come into effect as from the year of assessment of 2018.

Also in light of the international tax measures such as BEPS, the NID seeks to bring into line the tax treatment of the cost of equity with the cost of debt, since this latter is a tax-deductible expense. With this measure, debt financing is put on the same level playing field with equity financing, as entities now have the option to claim a deduction of a notional interest against their income.

TAX UPDATE

NOTIONAL INTEREST DEDUCTION

A. Introduction

Via the 2018 Budget Laws, the Maltese Government seeks to introduce new rules regarding deductions of notional interest on risk capital. The aim of the
Notional Interest Deduction (NID) is to achieve neutrality between debt and
equity financing. Such rules come into effect as from the year of assessment of 2018.

Also in light of the international tax measures such as BEPS, the NID seeks to bring into line the tax treatment of the cost of equity with the cost of debt, since this latter is a tax-deductible expense. With this measure, debt financing is put on the same level playing field with equity financing, as entities now have the option to claim a deduction of a notional interest against their income.

B. Who can claim the Notional Interest Deduction?

Maltese registered companies as well as partnerships have the option to claim a deduction of notional interest against their chargeable income. The option also extends to Malta permanent establishments of foreign companies.

C. Calculating the Notional Interest Deduction

In order to determine the deductible NID, one has to apply the following
formula:

NID = Notional Interest Rate X Total Risk Capital

Wherein:

• Notional Interest Rate = 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;
• Total Risk Capital = the share capital including any share premium, interest free debt, positive retained earnings, and any item reported as equity including contribution reserves, in the entity’s financial statements as at financial year end. If the NID is claimed by a Maltese permanent establishment of a
  non-Maltese resident undertaking, the total risk capital is taken to be
  the capital attributable to the permanent establishment.

In addition, it is important to take into account the following:

• Capping of NID: There is an annual capping at 90% of the chargeable income. Excess NID is carried forward and can be deducted against chargeable income derived in future years;
• Deemed Receipts of NID: When a company or partnership claims a NID, the shareholder or partner is deemed (for tax purposes) to have received the corresponding notional interest income from the company or partnership;
• No further tax: Dividend distributions made out of profits relieved from tax through a NID claim would not be chargeable to further tax at the level of the shareholder;
• Anti-Avoidance Rules: The rules contain anti-avoidance rules to curb abusive application of the NID.

D. CONCLUSION

The NID seeks to bring on par the tax treatment of debt and equity financing, and hence facilitating and incentivising financing via equity.

E. DISCLAIMER 

This publication has been prepared as a general guide and for information purposes only. It is not a substitution for professional advice. One must not rely on it without receiving independent advice based on the particular facts of his/her own case.  No responsibility can be accepted by the authors or the publishers for any loss occasioned by acting or refraining from acting on the basis of this publication.

November 2017