By virtue of Legal Notice 37 of 2018, the Maltese government introduced the Notional Interest Deduction (NID) Rules. Traditionally, businesses operating in Malta finance their operation via debt, given that interest is a deductible taxable expense. On the other hand, equity funded business do not have a corresponding deduction and hence the NID aims to equate the tax treatment of debt and equity by allowing the deduction of a notional interest over equity.
The amount of notional interest available for deduction is calculated annually on the amount of risk capital. Adherence to the NID Rules is optional and undertakings claiming the NID should not be able to benefit from the refundable tax credit system on the same profits.
The interest on risk capital is calculated by multiplying the reference rate, which represents the risk-free rate set by reference to the yield to maturity on Malta Government Stocks with a remaining term of approximately 20 years plus a premium of 5%; and the risk capital of the undertaking for the accounting period ending in the year preceding the year of assessment less any risk capital directly employed in the form of securities, interest in a partnership, contributions and any other loans or debts that do not bear interest that the undertaking holds in or provides to any person that is:
- Not employed by the undertaking in producing any income in the year, which if produced could have been exempt from income tax; or
- Employed in producing income for the year which is exempt from income tax.
The NID to be utilised by the undertaking in any particular year of assessment would be limited to a maximum of 90% of the chargeable income of the company for the year which (in the absence of the NID) would have been allocated to the Maltese Taxed Account (MTA) or Foreign Income Account (FIA) in full. Any NID which is claimed but not utilised in a year of assessment may be carried forward for utilisation in the subsequent year/s of assessment. The remaining chargeable income is subject to tax at the standard applicable rates. The Rules also contain an anti-abuse conditions to deter any abuse of such deduction.
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