IN501 - Malta - Introduction of Notional Interest Deduction Regime (NID)

Malta introduced the Notional Interest Deduction Regime (NID) in October 2017. It comes into force at the start of the 2018 Maltese corporate tax year (1 January 2018).

What is NID?

NID is an innovative way for companies to reduce their tax liabilities. This option will be of greatest interest to companies with large equity balances.

NID allows companies to deduct a notional interest amount based on the ‘risk’ capital of a company. Such companies will be able to claim a deduction against their chargeable income for NID deemed to be incurred on their equity capital. Previously in Malta, debt interest has been tax deductible, whilst dividends have not been.

‘Risk’ capital is defined as: share capital, share premiums, retained earnings, interest free debt and any other equity.

Ability to Choose Between NID and the Maltese Tax Refund System

Commencing in tax year 2018, Maltese companies, including permanent establishments of foreign companies in Malta, and partnerships, can elect to use either the Notional Interest Deduction Regime OR the tax refund system (6/7ths or 5/7ths).

Tax Refund System – the Alternative to NID

Malta operates a full imputation system of taxation which allows for generous tax refunds. In most instances, shareholders not resident in Malta can apply for a tax refund of 6/7ths of the tax paid on the active profits used to pay a dividend. With a corporate tax rate of 35%, this results in an effective tax rate of 5%. In the case of passive interest and royalties, non-resident shareholders can apply for a tax refund of 5/7ths of the tax paid on the passive income used to pay a dividend.  With a corporate tax rate of 35%, this results in an effective tax rate of 10%.

NID in More Detail

Notional Interest Deduction is calculated by multiplying:

  • The notional interest rate* BY
  • The company’s total equity at its financial year end.

*Notional interest rate is defined as the ‘risk free rate’; the current yield to maturity of Malta Government stocks, with a remaining term of approximately 20 years, plus a 5% premium.

Additional Features of NID

  • NID claimed in any one year cannot exceed 90% of the company’s taxable income. Any excess can be carried forward indefinitely, to be deducted against taxable income in future years. Remaining income is taxed at the standard rate of 35%.
  • No tax refund is paid to shareholders under the Notional Interest Deduction Regime and this therefore removes the need to have a double tier company structure.

Notional Interest Income in Relation to Shareholders

Where NID is claimed, the shareholder (or partner) will be considered to receive the same amount of notional interest income, for Maltese tax purposes. If a shareholder is not resident in Malta, the deemed interest income will, however, be exempt from tax in Malta, providing that certain criteria are met.

Timing Implications

Taxpayers will be able to claim NID, for the first time, on profits relating to the 2017 tax year, as these profits are assessable for income tax in 2018.

Additional Information

If you have any questions or require any further information please contact the Dixcart office in Malta: advice.malta@dixcart.com or speak to your usual Dixcart contact.

 

Categories: Malta, 2017