Notional Interest Deduction Rules

The Notional Interest Deduction Rules have been introduced by means of Legal notice NO 262 of 2017, published on 5 October 2017.

The NID brings an equal tax treatment of debt and equity financing by allowing entities to deduct deemed interest on their equity. This provision shall take effect from year of assessment 2018.

However, given that this election is optional, the business entity has full discretion not to opt in.

The NID is computed by multiplying the interest rate to the risk capital of the business:

  1. The reference rate is the ‘risk free’ rate set by reference to the current yield to maturity on Malta. Government Stocks with a remaining term of approximately 20 years plus a premium of 5%;
  2. The risk capital of the undertaking for the accounting period ending in the year preceding the year of assessment includes the share capital, share premium, reserves and interest free loans as at end of year.

The NID may be claimed as a deduction from the undertakings’ chargeable income for the year which may not exceed 90% of the chargeable income.

The legislation also allows for anti-abuse provisions to prevent taxpayers from attaining unwarranted advantages that go against the objective of the new rules.

Contact our team of experts to help you understand how the NID can impact your business.