Notional Interest Deduction Rules, 2018

L.N. 37 of 2018

INCOME TAX ACT

(CAP. 123)

Notional Interest Deduction Rules, 2018

IN EXERCISE of the powers conferred by articles 14(1)(o) and

96 of the Income Tax Act, the Minister for Finance has made the

following rules:-

(1)

The title of these rules is the Notional Interest Citation and

commencement.

Deduction Rules, 2018.

(2)

These rules shall come into force 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 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 positive balance

which is shown as equity in the financial statements of the

undertaking; and

(b) where the undertaking is a company or partnership

that is not resident in Malta, that part of the risk capital, as

defined in paragraph (a), of that undertaking that is attributable

to the permanent establishment situated in Malta; and

"undertaking" means a company or a partnership resident

in Malta or any other company or partnership that is not resident

in Malta that derives income that is effectively connected with a

permanent establishment of the company or partnership situated

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 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

Provided that the entitlement to a deduction in terms of

this sub-rule shall apply only in respect of profits which stand to be

allocated to a company's Foreign Income Account or Maltese Taxed

Account or in respect of profits of any other undertaking which, had it

been a company, would have stood to be allocated to its Foreign

Income Account or Maltese Taxed Account. In any such case, the

limitation set out in sub-rule (2) of rule 4 shall be calculated on the

basis of the undertaking's income which stands to be allocated to

Foreign Income Account or Maltese Taxed Account or which would

stand to be so allocated if the undertaking were a company.

(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 partners of the undertaking approve the claiming of

such deduction in respect of the particular 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.

(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 less any risk capital directly employed in the form of

securities, interest in a partnership, contributions and any other

loans or debts that do not bear interest that the undertaking

holds in or provides to any other person whether resident in

Malta or otherwise (hereinafter in this sub-rule collectively

referred to as “the invested risk capital”), to the extent that such

invested risk capital is

(a)

not employed by the undertaking in producing any

income in the year preceding the year of assessment in a

situation where had any such income been produced it could

have been exempt from tax in terms of the Act, or

(b) employed in producing income in the year preceding

the year of assessment which is exempt from tax in terms of the

Act.

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

(a)

where in respect of any year preceding a year of

assessment, interest resulting from the above computation exceeds

ninety per cent (90%) of the undertaking’s chargeable income for the

said year prior to taking into account the deduction allowable in terms

of sub-rule (1) of rule 3, 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 that is a company 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.

(b) 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 of

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

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

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) 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.

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.

The Notional Interest Deduction Rules, 2017 are hereby

revoked.

€0.36