What We Think
April 10, 2020
Malta – Notional Interest Deduction Rules
Through the introduction of the Notional Interest Deduction Rules (‘NID’), Malta has brought the tax treatment of debt and equity on equal footing. Prior to these rules, debt financing was more favourable from a tax perspective, since the return to the investor (the interest) is tax deductible, whereas the return to an equity investor (dividends) was not.
These Rules provide for a tax deduction for sums that are deemed to be payable by way of interest on risk capital. For a company resident in Malta, ‘risk capital’ includes:
- Share Capital;
- Share Premium;
- Positive Retained Earnings;
- Interest free loans;
- Other reserves resulting from a contribution to the company.
The deemed interest is worked out using the following formula: Y = A x B.
Whereby ‘A’ represents the interest rate, which is the risk-free rate set by reference to the yield to maturity on Malta Government Stocks with a remaining term of 20 years, plus 5% and ‘B’ represents the risk capital, which includes the items listed above.
The total deduction cannot exceed 90% of the entity’s chargeable income for the year, and if the amount of interest on risk capital exceeds such amount, any excess may be carried forward to subsequent years.
Where a company claims such a deduction, the shareholder(s) are deemed to have received interest income equal to the amount of interest on risk capital claimed by the entity, according to their proportions of the nominal value held at the end of the year.
For further information on the above kindly contact: