Notional Interest Deduction

In presenting the Malta Budget 2017, the Minister for Finance announced the introduction of the Notional Interest Deduction (NID) – a fresh concept in Malta, which aims to simplify the Maltese tax system and approximate the tax treatment of equity with that of debt.

The legal notice outlining the rules was published on 5 October 2017 as legal notice 262 of 2017.

Background

From a tax perspective, many entities find that debt financing is more efficient to raise finance for business investment and operations as opposed to equity. This is because finance costs incurred by companies upon the granting of loans may be allowable as a deduction against chargeable income.

In this respect, the introduction of the NID aims to bring on par the tax treatment of equity financing with that of debt financing by providing entities with a deduction of interest they are deemed to have incurred on the said equity.

Key features of the NID

• Election for the NID is at the discretion of a company or partnership.
• The NID is calculated by multiplying the deemed notional interest rate by the balance of risk capital that the undertaking has at year end.
• The notional interest rate is the risk free rate set on Malta Government Stocks with a remaining term of approximately 20 years plus a premium of 5%.
• The risk capital of the undertaking includes mainly share capital, share premium, reserves and interest free loans as at year end.
• The NID may also be claimed by a Maltese permanent establishment of a non-Maltese resident undertaking. In that case, the risk capital is taken to be the capital attributable to the permanent establishment.
• The NID may be claimed as a deduction by the undertaking against its chargeable income for the year.
• The maximum deduction in any given year cannot exceed 90% of chargeable income. Any excess can then be carried forward to the following year. Any remaining chargeable income is subject to tax at the standard rates.
• Uniformity of the classification of the nature of the deduction at the level of the person providing the equity finance.
• Certain anti-avoidance rules apply to prevent abuses of the NID.

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