Malta: Notional Interest Deduction Rules

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Companies that are resident in Malta are entitled to a notional deduction for sums that are deemed to be payable by way of Interest on Risk Capital. This deemed deductible expense shall apply only in respect of profits which stand to be allocated to a company’s Foreign Income Tax Account or Malta Taxed Account. This deduction shall be claimed at the option of the company. The company claiming this deduction must obtain the approval of all shareholders with regards to the financial statements of any basis year in respect of which the deduction is claimed.

The Interest on Risk Capital shall be calculated as follows:

Interest on Risk Capital = ‘Reference Rate’ x ‘Adjusted Risk Capital’

The Reference Rate is defined as the yield to maturity on Malta Government Stocks with a remaining term of approximately 20 years plus a premium of 5%.

Risk Capital is defined as the share capital, any share premium, positive retained earnings, loans or other debt borrowed by the company which does not bear interest, and any other reserves resulting from a contribution to the company, and any other positive balance which is shown as equity in the financial statements of the company. In the cases where the company is not resident in Malta, only that part of the Risk Capital of that company that is attributable to the permanent establishment situated in Malta shall be taken into account for the purposes of the calculation of the Interest on Risk Capital.

The Adjusted Risk Capital represents the Risk Capital less any Risk Capital directly employed in the form of securities and any other loans or debts that do not bear interest that the undertaking holds in or provides to any other person whether resident in Malta or otherwise (Invested Risk Capital), to the extent that such Invested Risk Capital is:

(a) not employed by the company in producing any income in a situation where had any such income been produced it could have been exempt from tax in terms of the Income Tax Act, OR

(b) employed in producing income which is exempt from tax in terms of the Income Tax Act.

For the purposes of these regulations the Risk Capital shall be computed by taking the total Risk Capital at the end of the particular accounting period.

Limitation and carry forward

Where the deemed Interest on Risk Capital resulting from the above computation exceeds 90% of the company’s chargeable income prior to taking into account such deemed Interest on Risk Capital, the amount of such excess shall not be available for deduction against the profits for the year, but may, at the option of the company, be carried forward for deduction and be added to the deduction due for the following year and deemed to be part of that deduction, or if there is no such deduction for that year, be deemed to be the deduction for that year and so on for subsequent years and any amounts carried forward as set out in this proviso shall be increased by such rate as may be prescribed by the Commissioner.

Where any Risk Capital results in a deduction being claimed by the company in terms of any other provision of the Income Tax Act or of any rules issued thereunder, the company shall be entitled to elect whether to claim a deduction in terms of these rules or in terms of such other provisions in respect of the amount which would qualify for deduction in terms of both these rules and the other provisions.

Impact on shareholders

Where a company claims a deduction for Interest on Risk Capital in calculating its total taxable income, the shareholder of the company as at the end of the year shall be deemed to have received in that year an amount of income equal to the Interest on Risk Capital claimed as a deduction by the company for the particular year of assessment.

The income taxable on the shareholder shall be characterised as interest for the purposes of the Income Tax Act and all provisions relating to the taxation of interest income shall apply to such deemed income: Provided that articles 32 to 42 of the Income Tax Act shall not apply to such deemed income.

Where the company has more than one shareholder, each shareholder shall be deemed to have received an amount of deemed income as corresponds to the proportion of the nominal value of the Risk Capital pertaining to each shareholder of the company at the end of the year, provided that on a request from a shareholder the Commissioner for Revenue may direct the shareholders of the company to divide the deemed interest income using an alternative basis.

Moreover, where a shareholder is deemed to have received Interest on Risk Income pursuant to a deduction claimed by the company, the shareholder will be entitled to deduct any Interest on Risk Capital which it is deemed to have incurred in terms of this rule against such deemed interest income without the limitations.

Anti-abuse provisions

Where in relation to a transaction, or to a series of transactions, sums are determined such that the company, the shareholder or shareholders thereof, or any person which is controlled and beneficially owned directly or indirectly to the extent of more than 50% by the same shareholders, is in a position to obtain an undue advantage which has the effect of reducing their liability to tax in a manner which is not reconcilable with the object and purpose of these rules, the Commissioner shall determine the relevant liability to tax in such manner and in such amount as may be necessary so as to nullify any such benefit or advantage. This is in addition to other anti-abuse provisions in the Income Tax Act.

 

This article is only addressing the regulations in so far as they relate to companies.

 

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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