Notional Interest Deduction Rules

Malta has recently introduced the concept of a Notional Interest Deduction (NID) through Legal Notice 262 of 2017.

Malta will be one of the few countries in the European Union offering the NID, which will be applicable with effect from the year of assessment 2018.

The NID aims to approximate the tax treatment of equity and debt by enabling entities to take a deduction of interest which they are deemed to have incurred on their equity. Such deduction is at the discretion of the company or partnership.

This NID is a product of two variables:

  • the reference rate – this is the risk-free rate which in terms of the NID rules is determined by reference to the current yield to maturity on Malta Government Stocks plus a premium of 5%; and
  • the risk capital on which the reference rate is applied – this includes share capital, share premium, positive retained earnings, interest free loans and any other reserves as at the end of the year.

Permanent establishments of a company not resident in Malta are also entitled to claim the NID, in which case the risk capital will be the capital of the permanent establishment.

The NID is claimed against the chargeable income for the year and must be approved by all shareholders.

Such deduction must be capped at 90% of the chargeable income for any given year – should there be any excess deduction, this may be carried forward to subsequent years and used as a deduction against chargeable income in those years.

The full amount taken as the NID shall be allocated to the Final Tax Account and a further 10% must be re-allocated from any other tax account to the Final Tax Account. The NID is subject to certain anti-avoidance rules to prevent abuse.

For more information, please contact Nicky Gouder or Luana Scicluna.