Determination of the Reference Rate for the purposes of the Notional Interest Deduction (NID) Rules

The Inland Revenue Department has issued a guideline for the purposes of determining the reference rate in connection with the NID rules.  In terms of the Rules, the interest on risk capital is calculated by multiplying the risk capital with the reference rate, which is defined as the risk free rate set by reference to […]

Written By ACT Team

On February 21, 2018
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The Inland Revenue Department has issued a guideline for the purposes of determining the reference rate in connection with the NID rules.  In terms of the Rules, the interest on risk capital is calculated by multiplying the risk capital with the reference rate, which is defined as 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%. 

The Maltese tax authorities have noted in their Guideline that the yield to maturity on Malta Government Stocks with a remaining term of approximately 20 years is published on the website of the Central Bank of Malta on a quarterly basis.  This may be accessed from https://www.centralbankmalta.org/malta-government-stocks.  The applicable rate may be found from the Year 20 row. 

In this respect, an undertaking is required to determine the reference rate for the purposes of calculating the notional interest deduction by reference to the risk-free rate published by the Central Bank of Malta for the end of the quarter falling on the same day as the end of the accounting period of the particular undertaking. For example, the risk-free rate at the end of Q4 2017 is 2.03%. To arrive at the reference rate, this must be added to the 5% premium. Therefore, the reference rate at the end of calendar year 2017 is 7.03% (i.e. 2.03% + 5%). 

Should the end of the accounting period of the said undertaking not fall at the end of a quarter, the undertaking shall calculate the NID on the basis of the reference rate applicable as at the end of the quarter immediately preceding the end of the accounting period ending in the year preceding the year of assessment for which the NID is claimed. 

How can we help?  

For further information, please contact one of the firm’s tax partners, Stephen Balzan on [email protected] or Elaine Camilleri [email protected]. ACT can help you understand the changes to the tax rules and how these can impact your business.  

Apart from its offices in St. Julian’s Malta, ACT operates from a second office in Gozo, which is situated in the capital city of Victoria.  For an appointment in our Gozo office, please call on 00356 21378672 or send us an email on [email protected].