By means of Legal Notice 411 of 2018, Malta has like all other EU Member States implemented the EU Anti-Tax Avoidance Directive. The regulations will be applicable as from 1st January 2019 with the exception of those relating to Exit Taxation which will be applicable as from 1st January 2020.
The following is a brief summary of Rule 4 of the regulations which deal with Interest Limitation.
The ATAD introduces a common minimum level of protection against the erosion of tax bases of EU member states and the shifting of profits out of the EU. The interest limitation rule is necessary to discourage Base Erosion and Profit Shifting (BEPS) practices by limiting the deductibility of a taxpayer’s exceeding borrowing costs.
When interest and similar borrowing costs of a company exceed taxable interest revenues and other economically equivalent taxable revenues, the maximum tax deduction that can be claimed in a tax period in respect of the excess costs will be 30% of EBITDA (earnings before interest, tax, depreciation and amortisation). Exceeding borrowing costs may be carried forward indefinitely, while unused interest capacity (unabsorbed interest allowance for the current year plus any unused interest allowance brought forward from previous years) may be carried forward for a maximum period of 5 years.
To reduce administrative costs, Malta has in line with the EU directive opted to provide for a safe harbour rule so that net interest will always be deductible in cases where the exceeding borrowing costs do not exceed €3,000,000, even if this leads to a higher deduction than the EBITDA based ratio
In line with the EU Directive, the regulations envisage the possibility of this limitation being calculated and applied at group level. It is expected that the Commissioner for Revenue will be issuing guidelines in this respect. The limitation rule will also not apply to financial undertakings. Nor will it apply to costs on loans used to fund long-term public infrastructure EU projects or loans concluded before 17th June 2016, to the extent that the terms of such loans are not subsequently modified. In case of modification, the grandfather clause would not apply to any increase in the amount or in the duration of the loan.
Malta has also opted, in line with the EU directive to exclude stand-alone entities from the provisions of these rules given the limited risk of tax avoidance and because BEPS through excessive interest payments usually takes place between associated enterprises. A standalone entity is defined in the rules as a tax payer that is not part of a consolidated group for financial accounting purposes and has no associated enterprise or permanent establishment.