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:

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:

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