Amendments to the Notional Interest Deduction Rules
Deloitte Malta Tax Alert
On 2 February 2018, the Minister for Finance published the Notional Interest Deduction (NID) Rules 2018 (Legal Notice 37 of 2018), replacing the Notional Interest Deduction Rules 2017 (for prior coverage, see Deloitte Malta Tax Alert ‘Introduction to the Notional Interest Deduction Rules’).
The NID Rules 2018 are applicable for financial years ending on or after January 1, 2017 and are intended to achieve alignment in the tax treatment in Malta between debt and equity. In order to achieve this, companies and partnerships resident in Malta, and the Malta permanent establishments of foreign companies or partnerships, are entitled to claim a deduction for notional interest on “risk capital”.
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Main features of the NID Rules 2018
The claiming of a NID is optional and undertakings are not obliged to claim any available deduction.
The available deduction is calculated by multiplying: (i) the notional interest rate (i.e. 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) by (ii) the undertaking’s risk capital on the basis of its total risk capital at its financial year-end (i.e. share capital, including any share premium, interest-free debt, positive retained earnings and any other item reported as equity in the undertaking’s financial statements, including contribution reserves) less any invested risk capital which the undertaking holds in or provides to any other person (i.e. securities, interest in a partnership, contributions and interest free loans or debts), to the extent that the invested risk capital is employed by the undertaking in either (a) producing income which is exempt from tax in Malta or (b) in producing income which, had it been produced, could have been exempt from tax in Malta.
NID may be claimed against profits other than profits derived from real estate situated in Malta and is capped at 90% of the undertakings eligible profits for the year. Any excess NID may be carried forward indefinitely, to be deducted against chargeable income in future years.
Where NID is claimed, the undertaking’s shareholder (or partner, in the case of a partnership) will be deemed for Malta tax purposes to have received notional interest income in the same amount. Where a shareholder or partner of the undertaking is not resident in Malta, the deemed interest is exempt from tax in Malta, in line with the treatment in Malta of outbound interest.
Dividend distributions made out of profits relieved from tax through a NID claim will not be subject to further tax in Malta at the level of the shareholder or partner.
An anti-avoidance rule is included to prevent abusive application of the regime.