As part of Malta’s implementation of the EU’s Anti-Tax Avoidance Directive (ATAD), an important change has been made with respect to the deductibility of business interest expense incurred with effect from 1 January 2019.
Before ATAD was transposed into Maltese law, interest was deductible in terms of our general deductibility rule, that is, where the interest is wholly and exclusively incurred in the production of the income. As a result, interest paid on money due in relation to the company’s trading activities, such as interest on a bank overdraft facility, would be deductible against trading income. In addition, interest on borrowed money would be deductible if it is paid on capital employed in acquiring income, for instance, interest would be deductible against rental income if the interest is incurred on a loan taken to finance the property being rented out.
The new rule limits a group’s ability to deduct borrowing costs, including interest expense, from taxable profits. Exceeding borrowing costs are deductible only up to 30% of the taxpayer’s earnings before interest, tax, depreciation and amortisation (EBITDA).
The 30% limitation effectively applies only to exceeding borrowing costs, that is, the excess of borrowing costs over interest income and other equivalent taxable revenues from financial assets that the taxpayer receives.
Any borrowing costs which cannot be deducted may be carried forward for relief in other years for a maximum of 5 years.
Beyond the basic rule outlined above, Malta has excluded from the scope of the interest limitation rule the following situations:
- exceeding borrowing costs falling below €3 million;
- entities that are not part of a consolidated group for financial accounting purposes and have no associated enterprises or Permanent Establishments;
- financial undertakings; and
- exceeding borrowing costs incurred on loans used to finance long-term public infrastructure EU projects and loans which were concluded before 17 June 2016.
Groups operating in Malta should consider the operation of these rules at an early stage since the result may be a disallowance of interest expense, leading to an increased cost of capital. Certain groups will not face a permanent disallowance of interest, but will have to deal with timing differences caused by fluctuations in EBITDA, interest expense and other variables.