On the 5th of October 2017, a new legal notice was published whereby the Notional Interest Deduction Rules were introduced.
These shall come into force with effect from Year of assessment 2018 (basis year 2017). The main objective is to address the dissimilarity within the Income Tax Act vis-à-vis tax deductibility available for interest on debt financing which is not available when it comes to equity financing.
An undertaking, being a company or a partnership resident in Malta or alternatively a Maltese permanent established of a non-resident company or partnership, may now elect to claim a notional deduction for “interest on risk capital”.
- The notional deduction shall be equivalent to a percentage, (“the reference rate”), of “the risk capital” of the undertaking for the year under review. The “reference rate” is to be calculated by taking the current yield to maturity on Malta Government Stock with a remaining term of 20 years plus a 5% premium.
- The deduction shall be capped at 90% of the company’s chargeable income with the option to carry forward any excess to the following years.
- The “risk capital” refers to the share or partnership capital, share premium, positive retained earnings, loans or other non-interest bearing debt and any other reserves resulting from a contribution to the undertaking and any other item shown as equity in the financial statements of the undertaking, or in the case of a permanent establishment, the capital of the undertaking attributable to the permanent establishment.
- Such deduction is optional and may only be claimed if it is demonstrated that all shareholders or owners of the undertaking approve the claiming of such deduction.
When an undertaking makes such a claim, the shareholders/partners shall be deemed to have received, pro-rata to their nominal holdings in the same year of deduction, an amount of income equivalent to the deduction claimed by the company or partnership. On request from the shareholder or partner of the undertaking, the said interest may be divided using an alternative method as deemed fit by the Commissioner. The deemed receipt by the shareholders/partners is to be classified as interest income. The Rules specifically prohibit the application of the Investment Income Provisions (including the flat tax rate of 15%), however, the receipt of such income can still be subject to the exemption from tax available to non-residents, in terms of Article 12 (1)(c)(ii).
From a tax accounting perspective, an amount equivalent to 110% of the amounts of profits relieved from tax shall be allocated to the so-called Final Taxed Account before allocating the profits to any other tax account, with any refunds available to be calculated after such allocation.
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