By virtue of Legal Notice 37 of 2018, the Maltese government introduced the Notional Interest Deduction (NID) Rules. Generally, companies operating in Malta that are debt financed can deduct their interest expense from their taxable income giving them an advantage over equity financed companies that do not have a corresponding deduction. The NID aims at equating the tax treatment of debt and equity by allowing the deduction of a notional interest over equity.
How is the NID calculated?
NID is calculated by multiplying the reference rate by the amount of risk capital held by a company, partnership or permanent establishment held at the end of the proceeding accounting year. The reference rate refers to 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%. Risk capital is defined as any share capital, share premium, positive retained earnings, interest free loans and any other reserves resulting from a contribution which are shown as equity in the financial statements of the company.
What is the maximum NID that a company can claim?
The NID can be deducted only from taxable income that stands to be allocated to the Foreign Income Account or the Maltese Taxed Account and may not exceed 90% of the chargeable income.
What is required for a company to apply the NID?
When a company applies the NID it has a direct implication on the shareholder as a corresponding deemed interest income would be considered as arising in the hands of the shareholder. This deemed interest income would be taxable in terms of the general Income Tax Act provisions. Hence, for a company to be able to apply the NID the approval of all the shareholders or partners needs to be demonstrated.
When can a company apply the NID?
The NID rules apply as from basis year 2017 (year of assessment 2018) hence they are already in force and can be availed from by companies.