The Notional Interest Deduction Rules, 2018 entered into force by virtue of Legal Notice 37 of 2018 (the “Notice”). The Notice repealed the previous Notional Interest Deduction Rules of the year 2017.
Pursuant to the Notice, with effect from year of assessment 2018, Malta companies and partnerships (as well as Malta permanent establishments of non-resident companies and partnerships) may claim deductions of sums that are deemed to be payable by way of interest on risk capital. The entitlement to a deduction applies only in respect of profits which stand to be allocated to a Foreign Income Account or Maltese Taxed Account of a Malta undertaking or, in case of partnerships, sums that would have stood to be allocated to these accounts should the undertaking be a company. The deduction is optional and subject to the approval of shareholders or partners of the undertaking.
Notional Interest Deduction Rules 2018 - Risk Capital
Pursuant to the Notice, the term "risk capital" means:
(i) where the undertaking is a company or partnership resident in Malta, the share or partnership capital of the undertaking, any share premium, positive retained earnings, loans or other debt borrowed by the undertaking which do not bear interest, and any other reserves resulting from a contribution to the undertaking, and any other positive balance which is shown as equity in the financial statements of the undertaking, and
(ii) where the undertaking is a company or partnership that is not resident in Malta, that part of the risk capital, as defined in point (i) above of that undertaking which is attributable to the permanent establishment situated in Malta;
Notional Interest Deduction Rules 2018 - Calculation
The available deduction is to be calculated using the formula specified by the Notice. In line with the guidance note issued by the tax authorities the risk-free rate used should be that published by the Central Bank of Malta for the end of the quarter falling on the same day as the end of the accounting period of the particular undertaking or where an undertaking's accounting period does not fall at the end of a quarter, the rate for the quarter immediately preceding the end of the accounting period.
The maximum deduction in any given year cannot exceed 90% of the undertaking’s chargeable income, but the balance of the deduction over that threshold can be carried forward. Moreover, where an undertaking claims the deduction, it shall be deemed that its partners / shareholders have received interest income in proportion to the nominal value of risk capital held by them. However, the shareholder or partner will be entitled to deduct in full any interest on risk capital which it is deemed to have incurred at the level of the undertaking against his deemed interest income.
The Notice comes with a built-in anti-abuse rule that aims at preventing taxpayers from obtaining undue advantages contrary to the object and purpose of the Notice.