New Notional Interest Rules 2017 - Updated
Legal Notice LN 262 of 2017 has just been tabled in parliament with effective date for tax years starting for YA 2018.
The salient features are the following:
- A notional interest charge can be claimed by a company resident in Malta or a permanent establishment in Malta of a foreign company. This notional interest is calculated on risk capital - this is loosely defined as share capital, share premium, positive retained earnings, loans or other debt borrowed, or any other item showed as equity.
- The notional interest rate to be used is 5% plus the YTM of 20 year Malta Government Stock, at the moment standing at around 2.1%. Hence, the total notional interest rate that can currently be claimed is 7.1%.
- The company claiming the notional interest can opt to claim it even if it is currently paying interest, and has to choose either the former or the latter.
- There is a capping of the amount of interest which could be claimed in any one year, being not more than 90% of the company's chargeable income (excluding FRFTC). If any amount is not claimed due to this limitation, it could be carried over to subsequent years.
- The notional interest claimed shall be deemed to be income by the recipient. However, if the latter is a non-resident person the exemption of Art 12 (1)(c) ITA still applies.
- With regards to tax accounting, 110% of the profits relieved by the notional deduction shall be so allocated.
- Specific anti-avoidance clause in case of charges between companies owned as to more than 50%, directly or indirectly, by same shareholder/s. Where the latter "obtain an undue advantage which has the effect of reducing their liability to tax" the Commissioner shall determine the relevant liability to tax in such manner to reduce/nullify such benefit.
LN 262 of 2017 was revoked and replaced by LN 37 of 2018.
Furthermore the Inland Revenue Department provided a clarification note on the applicability thereof.
The aforementioned main provisions of the 2017 regulations have remained with the following notable differences:
- The notional interest deduction may only be claimed against profits which stand to be allocated to the Foreign Income Account or Maltese Taxed Account.
- The methodology for computing the notional interest has changed by having the value of the risk capital reduced by any possible risk capital not employed in producing income or employed in producing income that, if so used, would be exempt from tax in Malta.
- The reference to the Flat Rate Foreign Tax Credit (FRFTC) on value of the capping of the interest that may be claimed has been removed.
- Reference to a 110% allocation of profits relieved by notional deductions to the Final Tax Account has been removed.
- The notional interest rate for the calendar year 2017 has been set at 7.03%.