By means of Legal Notice 262 of 2017, the Government of Malta has issued new rules which provide for a notional interest deduction against the chargeable income of an undertaking for sums that are deemed to be payable by way of interest on risk capital.
In the case the undertaking is a company or a partnership resident in Malta, the risk capital is defined as the share or partnership capital of the undertaking, any share premium, positive retained earnings, loans or other debt borrowed by the undertaking which do not bear interest, and any other reserves resulting from a contribution to the undertaking, and any other item which is shown as equity in the financial statements of the undertaking. Where the undertaking is a permanent establishment of a company or a partnership that is not resident in Malta, the term shall mean the capital of that undertaking which is attributable to the permanent establishment.
The deduction may be claimed at the option of the undertaking and such deduction may only be claimed if all shareholders or owners of the undertaking approve the claiming of such deduction in respect of the particular year of assessment.
The interest on risk capital is calculated as follows: Y = A X B where
“Y” represents the interest on risk capital that an undertaking is entitled to claim in the relevant year of assessment;
“A” represents the reference rate, which means 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%;
“B” represents the risk capital of the undertaking for the accounting period ending in the year preceding the year of assessment.
Where the interest on risk capital exceeds 90% of the company’s chargeable income (before adding the FRFTC if applicable) for any year prior to taking into account such deduction, the amount of such excess shall not be available for deduction against the profits for the said year, but may, at the option of the undertaking, be carried forward to be deducted against future taxable profits. Any amounts carried forward shall also be increased by such rate as may be prescribed by the Commissioner for Revenue.
Where an undertaking claims this deduction, the shareholder or partner of the undertaking shall be deemed to have received in that year an amount of income equal to the interest on risk capital claimed as a deduction by the undertaking for the said year of assessment, corresponding to the proportion of the nominal value of the risk capital which each shareholder or partner, holds in the undertaking. The income shall be characterized as interest and all the provisions relating to the taxation of interest income (with the exception of the ‘investment income provisions’ found in Articles 32 to 42 of the ITA) shall apply to such deemed income.
Where a shareholder or partner of an undertaking is deemed to have received interest income as explained above, the shareholder or partner will be entitled to deduct any interest on risk capital which it is deemed to have incurred in terms of this rule against such deemed interest income without the 90% limitation mentioned above.
Where any risk capital results in a deduction being claimed by the undertaking in terms of other provisions of the Income Tax Act, the undertaking shall be entitled to make a choice whether to claim a deduction in terms of these rules or in terms of the other rules.
Where profits of an undertaking are relieved from tax through the above-mentioned deduction, an amount corresponding to 110% of the amount of profits which are so relieved from tax are to be allocated to the undertaking’s final tax account. If the amount of profits which are to be allocated to the final tax account exceeds the total profits of the undertaking for the particular basis year, any such excess shall be ignored for the purposes of the allocation.
Certain anti-avoidance rules apply to prevent the abuse of this deduction.
