National Interest Deduction Rules (the “NID Rules”) have been published by means of Legal Notice 37 on the 2 February 2018, as envisaged in the 2017 budget. NID Rules shall become applicable as from the 2018 year of assessment, aiming to bring in line the tax treatment of equity financing with that of debt financing. This will be achieved through a deduction of “interest on risk capital”. Specifically, Malta companies and partnerships (including Malta permanent establishments of foreign companies or partnerships) will be able to claim a deduction against their chargeable income for notional interest deemed to be incurred on their equity capital (“NID”). Such a claim is at the option of the entity.
The NID will be calculated on the basis of a formula set out in the NID Rules, i.e. by multiplying (a) the reference rate (i.e. 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%) by (b) the entity’s total risk capital at its financial year end. The ‘risk capital’ includes share capital, including any share premium, interest-free debt, positive retained earnings and any other item reported as equity in the entity’s financial statements.
The NID Rules limits the claim for a deduction to 90% of the chargeable income of the entity. However, any excess notional interest may be carried forward indefinitely to be deducted against chargeable income in future years.
In the event that NID is claimed, the shareholder (or partner in case of a partnership) shall be deemed to have received interest income and where he/she is not resident, the deemed interest should be exempt from tax in Malta provided certain requirements are met.
Anti-avoidance provisions are also introduced in the NID Rules to prevent abusive behaviour.
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