NOTIONAL INTEREST DEDUCTION RULES

NOTIONAL INTEREST DEDUCTION

SUBSIDIARY LEGISLATION 123.176

NOTIONAL INTEREST DEDUCTION RULES

2nd February, 2018

LEGAL NOTICE 37 of 2018.

(1)

The title of these rules is the Notional Interest

Deduction Rules, 2018.

(2)

These rules shall come into force from year of

assessment 2018.

In these rules, unless the context otherwise requires: –

"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

NOTIONAL INTEREST DEDUCTION

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

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(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

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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.