Notional Interest Deduction

Introduction to Malta’s Notional Interest Deduction (NID)

Maltese legislation allows for a deemed interest deduction, known as Deemed Interest Deduction (NID). NID was introduced by means of legal notice 262 of 2017 and came into force with effect from year of assessment 2018. Claiming NID is at the option of the company or partnership.

Purpose of NID: Aligning Equity and Debt Financing

From an income tax perspective, entities often find that debt financing is more efficient as opposed to equity and this is because finance costs are allowable as a deduction against chargeable income. However, with the introduction of the NID in 2017, Malta brought on par the tax treatment of equity financing with that of debt financing by providing entities with a deduction of interest they are deemed to have incurred on the said equity or ‘invested risk capital’. Invested risk capital is made up of the issued share capital, positive reserves and interest free loans as at year end.

How the NID Is Calculated

The NID is calculated as being the ‘reference rate’ plus a premium of 5%. The ‘reference rate’ is taken as being the yield to maturity on Malta Government Stocks with a remaining term of approximately 20 years. As indicated, the NID rate (which currently works out at around 7%) is calculated on the invested risk capital. However, the maximum allowable deduction against the chargeable income is 90% and any unutilised NID may be carried forward and available as a deduction against future chargeable income (subject to the 90% limitation).

Special Rules for Non-Standard Accounting Periods and Permanent Establishments

In cases where the accounting period is not 12 months, the NID shall be inflated or reduced by multiplying the deduction by the number of days in the accounting period and dividing the result by 365. The NID may also be claimed by a Maltese permanent establishment of a non-Maltese resident undertaking. In such a case, the invested risk capital is taken to be the capital attributable to the permanent establishment.

Shareholder and Partner Approval Requirements

The shareholder/s or partners must approve the claim for NID and the actual reduction in the total income for a particular year of assessment. Therefore, the approval is not generic but specific to a particular year. When a company or partnership claims a NID, the shareholder or partner is deemed (for tax purposes) to have received the corresponding notional interest income from the company or partnership. The resident shareholder/s or partners will be subject to tax on the interest income which is deemed to accrue and is attributed to them according to the capital or the proportion of the shares (at the nominal value) that each shareholder holds in the company as at the end of the undertaking’s accounting period. The deemed interest income is not relevant to non-resident shareholders.

Direct and Indirect Attribution Rules

The NID rules provide for a direct and indirect attribution. An undertaking may claim a deduction for NID against such income that forms part of the chargeable income of the undertaking which stand to be allocated to the Maltese Taxed Account (MTA) and the Foreign Income Account (FIA). NID that is attributable to a specific source of income may only be deducted against such income. The NID in respect of capital that does not produce any income shall not be allowed as a deduction. NID that is directly attributable to any tax account other than the MTA or the FIA shall be forfeited.

How we can help

Indeed, the NID claims may be complex in those situations where the undertaking has various sources of income and if some of the sources are exempt from tax (such as the participation exemption). EMCS may advise and assist even in these complex situations to ensure adherence to the legislation and the guidelines issued by the tax authorities.