Interest Deduction Limitation Rules

Printable Version

These interest deduction limitation rules applicable in Malta are concerned with limiting the extent to which borrowing costs, including but not limited to interest payable, may be deducted for tax purposes from interest revenues and other economically equivalent taxable revenues. The term “exceeding borrowing costs” is used in the regulation to mean the amount by which the deductible borrowing costs of a taxpayer exceed taxable interest and other economically equivalent taxable revenues. These rules are effective as from the 1st January 2019.

The exceeding borrowing costs deductible in the tax period in which they are incurred are being limited to 30% of the taxpayer’s earnings before interest, tax, depreciation and amortisation (EBITDA).

For the purpose of calculating the 30% threshold the EBITDA shall be calculated by adding back to the taxable income, the tax-adjusted amounts for exceeding borrowing costs as well as the tax-adjusted amounts for depreciation and amortisation. Tax exempt income shall be excluded from the EBITDA.

The rules cover taxpayers that are single entities, entities permitted or required to apply the rules on behalf of a group, and an entity in a group which does not consolidate the results of its members for tax purposes. In the latter case exceeding borrowing costs and the EBITDA may be calculated at the level of the group and comprise the results of all its members.

These rules do not apply for exceeding borrowing costs of up to three million euros (€3,000,000). In the case of group entities, the amount of three million euros is to be considered for the entire group.

Exemptions

A single entity that is not part of a consolidated group for financial accounting purposes AND has no associated enterprise or permanent establishment is considered to be a standalone entity and exempt from these rules.

Costs incurred on loans which were concluded before 17 June 2016, are excluded from the scope of these rules and therefore remain fully tax deductible. This exclusion shall not extend to any subsequent modification of such loans. Costs incurred on loans used to fund a long-term public infrastructure project are also excluded subject to certain conditions.

Where the taxpayer is a member of a consolidated group for financial accounting purposes, the taxpayer may fully deduct its exceeding borrowing costs if it can demonstrate that the ratio of its equity over its total assets is equal to or higher than the equivalent ratio of the group and subject to the following conditions:

  • the ratio of the taxpayer’s equity over its total assets is considered to be equal to the equivalent ratio of the group if the ratio of the taxpayer’s equity over its total assets is lower by up to two 2%; AND
  • all assets and liabilities are valued using the same method as in the consolidated financial statements referred to in sub-regulation (8) below.

Financial undertakings (as defined by the rules) are excluded from the scope of these regulations including where such financial undertakings are part of a consolidated group for financial accounting purposes.

General

Exceeding borrowing costs may be carried forward without time limitation. Unused interest capacity may be carried forward for a maximum of 5 years to the extent that it cannot be deducted in the current tax period.

For the purpose of this regulation, the consolidated group for financial accounting purposes consists of all entities which are fully included in consolidated financial statements drawn up in accordance with the International Financial Reporting Standards or any other accounting standard as determined by the guidelines.

 

This article is only intended to give a general overview of the legislation. Professional advice should be separately sought on the applicability of these rules to any actual company structure or situation.

Please contact David Marinelli, DM Europe, should you wish to discuss any matter relating to Companies registered in Malta.

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