Pursuant to the introduction of Notional Interest Deduction (NID) Rules it became possible for Malta companies as well as partnerships (including Maltese permanent establishments of foreign entities) to claim a deduction based on deemed interest payable on risk capital. NID Rules were initially introduced by means of Legal Notice 262 of 2017, which was subsequently revoked by Legal Notice 37 of 2018.
One of NID’s principal aims was that of tackling the mismatch emanating from the Income Tax Act, specifically by allowing the cost arising from debt financing by way of a deduction for tax purposes, but not allowing that arising from equity financing. With the introduction of NID and its allowance for tax purposes, it is intended for this mismatch to be neutralised.
As set out in the Rules, NID is calculated by multiplying the notional interest rate by the balance of risk capital as at the end of the accounting period. The notional interest rate is the risk-free rate as set on the Malta Government Stocks with a remaining term of approximately 20 years plus a premium of 5%. On the other hand, the Rules define risk capital as substantially including capital, reserves and loans or other debts which do not bear interest, as long as these are employed in generating trading income which is taxable.
On 11th July 2019 the Commissioner for Revenue issued updated Guidelines in relation to NID Rules. The update, which is applicable as from year of assessment 2020, relates essentially to a clarification in relation to the calculation of NID for accounting periods which are longer or shorter than 12 months. To ensure that the deductions taken are not disproportionate in case of such accounting periods, the NID is to be inflated or reduced commensurate to the number of days of the relevant accounting period.
The maximum amount allowed by way of NID in any given year may not exceed 90% of the chargeable income for the year in question. Any excess may be carried forward to be set off against taxable income in subsequent years.
The NID may only be claimed against profits which for tax accounting purposes, are to be allocated to the Foreign Income Account (FIA) or the Maltese Taxed Account (MTA). In the case that no income is generated during such year then the right for such a deduction shall be lost.
The Malta entity has an option as to whether to claim such NID. In the event that such option is exercised, approval in writing needs to be obtained from all shareholders prior to proceeding. This in view of the fact that the shareholders would be deemed to have received such notional interest income from the Malta entity, proportionate to their holding.