Notional Interest Deduction Rules
 
 

Notional Interest Deduction Rules

Following the announcement during the Budget Speech in October 2017, new rules were introduced with the aim of reducing any tax disadvantages that entities may have with equity financing when compared to debt financing.

In this respect the Notional Interest Deduction Rules (Subsidiary Legislation 123.176 of the Laws of Malta) (hereinafter referred to as the "Rules") provide for a framework whereby entities may be allowed to deduct an amount (colloquially referred to as 'Notional Interest') of interest that such entities are deemed to have incurred on such equity.

 

Applicability of the Rules 

The Rules apply with effect from Year of Assessment 2018, that is basis year 2017.

 

Availability of the deduction

The Rules allow an entity to deduct against its chargeable income an amount equivalent to the interest on risk capital

Risk capital is defined in the Rules and includes any share premium, positive retained earnings, loans or other debt borrowed by the entity which do not bear interest as well as any other item which is shown as equity in the financial statements of the entity.

With regards to a permanent establishment (of a foreign company or partnership), risk capital shall be equivalent to the capital which is attributable to the permanent establishment in Malta.

The deduction is available at the option of the company or partnership if all the shareholders of the company or partners of the partnership (as applicable) approve such claim. 

 

Quantum of the deduction

The deduction to be allowed (i.e. the amount of interest on risk capital) is quantified as the reference rate multiplied by the amount of risk capital - as described above.

In turn the reference rate is defined as the risk free rate set on Malta Government Stocks plus a premium of 5%.

Accordingly an entity may claim a deduction equivalent to the interest on risk capital (to be calculated as described above) from its chargeable income. 

The total amount of deductions that may be claimed by an entity by virtue of the Rules shall not exceed 90% of the entity's chargeable income - with the excess (if any) being available to be carried forward to the following year. Any such excess that is carried forward is added to the deduction due for the following year, and if no such deduction is due for the following year, such amount carried forward will be considered to be the deduction for the following year.

The shareholders or partners (as applicable) of any entity claiming the deduction provided under the Rules shall be deemed to have received an amount equivalent to such a deduction. Such income in the hands of the shareholder or partner will be classified as interest in terms of the Income Tax Act. Where the company or partnership has more than one shareholder or partner, each of such shareholder or partner shall be deemed to have received a pro-rata share of such income, corresponding to his share of ownership of the risk capital - as applicable.

 

 
 
 

For further information contact:

 

David Farrugia   

Director – Legal & Tax Advisory                                         

E: david.farrugia@dfkmalta.com

 

Joseph Farrugia   

Senior Manager                                         

E: joseph.farrugia@dfkmalta.com

 

*The objective of this summary is to outline the principal elements of the rules being summarized herein. Accordingly, it is not intended to be provided by way of comprehensive and definitive advice. Readers should seek professional advice by contacting DFK Malta Tax & Consultancy Limited before acting upon any information included in this document.