On October 5, 2017, a legal notice on the Notional Interest Deduction (NID) Rules has been published. These rules introduce a new concept to the Maltese tax system applicable as of year of assessment 2018 whereby the tax treatment of equity is brought in line with the tax treatment of debt.
In terms of the NID Rules, Maltese companies, partnerships and permanent establishments may claim a notional deduction of interests incurred on risk capital. In this regard, risk capital is defined as share capital, share premium, retained earnings, and interest free debt as at year end. The rate at which this deemed interest is calculated is the risk free rate set by reference to the current yield to maturity on Malta Government Stocks with a remaining term of approximately 20 years, which currently stands at 2%, plus a premium of 5%. Hence, the current NID rate is set at 7% of the taxable income. The NID is capped at 90% of the chargeable income for each fiscal year, however, any unutilised NID can be carried forward indefinitely.
In order for a company to claim the NID, the approval of all shareholders is required. This is because the shareholders of the company claiming the NID will be deemed to have received a corresponding interest income to the deduction being claimed at company level. In this regard, one should note that such deemed interest income will be brought to charge in terms of the standard income tax rules applicable in Malta.
The NID Rules also incorporate an anti-avoidance provision to avoid that these rules are used in an abusive manner.
Should you have any questions on how the new NID Rules will impact your business, do not hesitate to contact our professional team at Corrieri Cilia Legal who will be able to assist you further.