Notional Interest Deduction Rules, 2017

L.N. 262 of 2017

INCOME TAX ACT

(CAP. 123)

Notional Interest Deduction Rules, 2017

IN exercise of the powers conferred by sub-article (2) of articles

14 and article 96 of the Income Tax Act, the Minister of Finance, the

has made the following rules:-

(1)

The title of these rules is the Notional Interest Citation and

commencement.

Deduction Rules, 2017.

(2) These rules shall come into force with from year of

assessment 2018.

In these rules, unless the context otherwise requires –

Interpretation.

"the Act" means the Income Tax Act;

"interest on risk capital" shall have the meaning assigned

to it in terms of rule 4.

"the reference rate" 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%;

"risk capital" means

(a) where the undertaking is a company or

partnership resident in Malta, 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 (hereinafter

referred to as "capital"); and

(b) where the undertaking is a permanent

establishment of a company or partnership that is not

resident in Malta, the term shall mean the capital of that

undertaking which is attributable to the permanent

establishment; and

"the undertaking" means a company or a partnership

resident in Malta or a permanent establishment situated in Malta

of a company or a partnership that is not resident in Malta.

(1)

For the purpose of ascertaining the total income of

an undertaking for a year of assessment, the undertaking shall be

entitled to a deduction against such income for sums that are deemed

to be payable by way of interest on risk capital or such part thereof as

may be determined by the undertaking for the particular year.

(2) The deduction referred to in sub-rule (1) shall be claimed

at the option of the undertaking in the return made pursuant to article

10 of the Income Tax Management Act, so however that such

deduction may only be claimed if it is demonstrated that all

shareholders or owners of the undertaking approve the claiming of

such deduction in respect of the particular year of assessment.

(1)

Interest on risk capital for a year of assessment

shall be calculated on the basis of the following

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;

"B" represents the risk capital of the undertaking for the

accounting period ending in the year preceding the year of

assessment.

For the purposes of this rule, "risk capital" shall be

computed by taking the total risk capital at the end of the particular

accounting period ending in the year preceding the year of

assessment.

(2) Notwithstanding the other provisions of this rule

(i)

where in respect of any year preceding a year of

assessment, interest resulting from the above computation

exceeds ninety per cent (90%) of the company’s chargeable

income (excluding the amount added to the income or gains in

terms of sub-article (1) of article 94 of the Act) for the said 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 for deduction and be added to the deduction due

for the following year and deemed to be part of that deduction,

or if there is no such deduction for that year, be deemed to be

the deduction for that year and so on for subsequent years and

any amounts carried forward as set out in this proviso shall be

increased by such rate as may be prescribed by the

Commissioner

Provided that where a shareholder or partner of an

undertaking is deemed, in terms of rule 5, to have received

interest income pursuant to a deduction claimed by such

undertaking, 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 limitation set out in this paragraph

(ii)

where any risk capital results in a deduction being

claimed by the undertaking in terms of any other provision of

the Act or of any rules issued thereunder (hereinafter "the other

provisions"), the undertaking shall be entitled to elect whether

to claim a deduction in terms of these rules or in terms of the

other provisions in respect of the amount which would qualify

for deduction in terms of both these rules and the other

provisions.

(1)

Where an undertaking claims a deduction in terms Where an

of rule 3 in calculating its total income for a year of assessment, the undertaking

claims a

shareholder or partner, as the case may be, of the undertaking at the deduction

terms of rule 3.

end of the year preceding the particular year of assessment 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.

(2) The income referred to in sub-rule (1) of this rule shall be

characterised as interest for the purposes of the Act and all provisions

relating to the taxation of interest income shall apply mutatis

mutandis to such deemed income

Provided that articles 32 to 42 of the Act shall not apply to

such deemed income.

(3) Where the undertaking has more than one shareholder or

partner at the end of the year preceding the year of assessment, each

shareholder or partner, as the case may be, shall be deemed to have

received an amount of deemed income as corresponds to the

proportion of the nominal value of the risk capital pertaining to each

shareholder or partner, as the case may be, holds in the undertaking at

the end of the year preceding the year of assessment

Provided that on a request from a shareholder or partner of

an undertaking, as the case may be, the Commissioner may, if he

deems fit, direct the shareholders or partners of the undertaking to

divide the deemed interest income using an alternative basis.

(1)

Without prejudice to the provisions of article 51 of

the Act, where in relation to a transaction, or to a series of

transactions, sums are determined such that the undertaking, the

shareholder or shareholders thereof, or any person which is controlled

and beneficially owned directly or indirectly to the extent of more

than 50% by the same shareholders, is in a position to obtain an undue

advantage which has the effect of reducing their liability to tax in a

manner which is not reconcilable with the object and purpose of these

rules, the Commissioner shall determine the relevant liability to tax in

such manner and in such amount as may be necessary so as to nullify

any such benefit or advantage.

(2) Where profits of an undertaking are relieved from tax

through the deduction referred to in rule 3 hereof, an amount

corresponding to one hundred and ten per cent (110%) of the amount

of profits which are so relieved from tax shall be allocated to the

undertaking’s final tax account in lieu of allocation to any other taxed

account

Provided that if the amount of profits which are to be

allocated to the final tax account in terms of this Rule exceeds the

total profits of the undertaking for the particular basis year, any such

excess shall be ignored for the purposes of allocation.

€0.36

Meta l-profitti tal-intrapriża huma meħlusa mit-taxxa

permezz tat-tnaqqis imsemmi fir-regola 3, ammont li jikkorrispondi

għal mija u għaxra fil-mija (110%) tal-ammont ta’ profitti li huma

meħlusa mit-taxxa għandhom jiġu allokati lill-kont tat-taxxa finali ta’

l-intrapriża minflok jiġu allokati għal kontijiet intaxxati oħra

Iżda meta l-ammont ta’ profitti li għandhom jiġu allokati

fil-kont tat-taxxa finali skont din ir-regola jaqbeż il-profitti totali tal-

intrapriża għas-sena bażi partikolari, kull eċċess bħal dan għandu jiġi

injorat għall-finijiet ta’ allokazzjoni skont din ir-regola.