Investing in Malta: Notional Interest Deduction

NID summary:A mechanism that permits companies with own capital invested to include an expense in lieu of the interest they would otherwise pay if funded through loans or other forms of debt.
Main advantage: lowers operational profit, resulting in a lower tax liability.
Applies to: Companies that are funded at least partly through “risk capital”.
Is it Mandatory?No, this tax method is optional

Notional Interest Deduction (NID)

Malta companies and partnerships (as well as permanent establishments in Malta of non-resident entities) may claim deductions of amounts that are deemed to be payable as interest on risk capital. The entitlement to this deduction applies only in respect of profits which are to be allocated to a Foreign Income Account or Maltese Taxed Account of a Malta undertaking (company, partnership etc).The deduction is optional and requires the approval of the shareholders or partners of the undertaking.

Risk Capital in NID

The term “risk capital” means the share capital, any share premium, positive retained earnings, any non-interest bearing loans or other debt borrowed by the undertaking, and any other reserves that result from a contribution to the undertaking, and any other positive balance which is shown as equity in the financial statements of the undertaking. Where the company is not resident in Malta, only the risk capital, as defined above, which is attributable to the permanent establishment situated in Malta will qualify for the purposes of calculating the NID. The same treatment is available to partnerships.

Calculation of Notional Interest Deduction

The available deduction is calculated using the formula specified at law. The formula makes reference to a risk-free rate as published by the Central Bank of Malta on a quarterly basis. 

The maximum deduction in any year cannot exceed 90% of the company’s chargeable income, but the balance of the deduction over that threshold may be carried forward. Moreover, where a company or partnership claims the deduction, it shall be deemed that its shareholders or partners have received interest income in proportion to the nominal value of risk capital held by them. However, the shareholder or partner will be entitled to deduct in full any interest on risk capital which it is deemed to have incurred at the level of the undertaking against his deemed interest income. 

An anti-abuse rule aims to prevent taxpayers from obtaining undue advantages that run contrary to the object and purpose of the governing legislation.