Introduction to the Notional Interest Deduction Rules
Deloitte Malta Tax Alert
ACT No. XVI of 2017, the 2017 Budget Measures Implementation Act, enacted an enabling provision for the introduction of rules on deductions of notional interest on risk capital (NID). The concept of NID is aimed at approximating neutrality between debt and equity financing.
These rules came into force with effect from year of assessment 2018 through Legal Notice 262 of 2017, the Notional Interest Deduction Rules, 2017 (NIDR) published on 5 October 2017.
The NID are designed to align the tax treatment of cost of equity with cost of debt (the latter being a tax deductible expense) and bring equity financing on a par with debt financing, by granting entities the option to claim a deduction against their chargeable income, of notional interest deemed to be incurred on their equity.
Salient features of the NIDR
- Companies (including Malta permanent establishments of foreign companies) and partnerships have the option to claim a deduction of notional interest deemed to be incurred on their risk capital, against their chargeable income;
- The NID is quantified by multiplying
(i) the notional interest rate - being 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;
(ii) the entity’s total risk capital as at financial year end – being 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;
- The NID claimed in any year is capped at 90% of the chargeable income, with any excess being carried forward to be deducted against chargeable income derived in future years;
- 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;
- 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;
- The NIDR contain specific anti-avoidance rules to curb abusive application of the NIDR.
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