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Malta Levels Tax On Debt, Equity Financing

by Amanda Banks, Tax-News.com, London

17 October 2017


Malta has enacted rules removing the tax bias in favor of debt financing by creating a notional interest deduction for equity financing.

The provision is intended to equalize the treatment of both, as deductions can be claimed for debt servicing costs.

From 2018, entities undertaking an equity issuance will be entitled to claim a notional interest deduction based on new Notional Interest Deduction rules published in early October.

The deduction is available to companies and partnerships resident in Malta, and permanent establishments of non-resident companies and partnerships.

The notional interest deduction is limited to 90 percent of an entity's chargeable income for a particular year, with any excess able to be carried forward and set against income in future years.

The amount of the notional interest deduction is equal to the "reference rate" applied to an entity's total risk capital at its year-end. Risk capital includes any share premium, interest-free debt, positive retained earnings, and any item reported as equity, including contribution reserves. The reference rate is the risk-free rate set by reference to the current yield to maturity on Malta Government Stocks with a remaining term of approximately 20 years plus a premium of five percent.

When an entity claims a notional interest deduction, partners or shareholders are deemed to receive deemed interest income from that entity.

TAGS: tax | business | Malta | interest | corporation tax

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