Updated Notional Interest Deduction guidelines published

On 20 December 2023, the Commissioner for Tax and Customs (‘CfTC’) published an updated set of guidelines (version 1.1) in relation to the Notional Interest Deduction (‘NID’) (the ‘Guidelines’).

The Guidelines are issued in terms of article 96(2) of the Income Tax Act, Chapter 123 of the Laws of Malta (the ‘ITA’) and are to be read in conjunction with the NID Rules contemplated within Subsidiary Legislation 123.176.

The first update concerns the shareholder or partner approval process with respect to excess, unabsorbed NID carry forward amounts. The Guidelines have clarified that such approval must be obtained in the year of assessment in which, and to the extent that, a claim for NID causes an actual reduction in the total income. In other words, such an approval must be obtained in the year of assessment in which the deduction is claimed as opposed to when the NID entitlement is generated.

The shareholders or partners are required to provide their approval by the earlier of the date on which the undertaking files its income tax return for the given year of assessment; or on the date on which any one of the said shareholders or partners ceases to be a shareholder or partner of the undertaking, as the case may be.

In addition, the second update clarifies that any decision taken by the CfTC to allocate deemed interest income on a basis other than the nominal value of the risk capital held shall, where applicable, constitute an exchangeable ruling in terms of the Cooperation with Other Jurisdictions on Tax Matters Regulations, Subsidiary Legislation 123.127 and the Joint Council of Europe/ OECD Convention on Mutual Administrative Assistance in Tax Matters Order, Subsidiary Legislation 123.150.

The final update to the Guidelines concerns NID claims vis-à-vis foreign sourced income arising from immovable property which falls within the purview of article 4(1)(e) of the ITA and associated allowable deductions as regulated by the Deduction of Expenses in respect of Immovable Property Rules in terms of Subsidiary Legislation 123.26. Where an undertaking derives foreign sourced rental income which falls within article 4(1)(e) of the ITA, that undertaking is also eligible to claim NID in respect of risk capital employed in acquiring the said income when determining the amount chargeable to income tax in terms of Subsidiary Legislation 123.26. However, it should be noted that the further deduction of 20% deduction provided for within sub rule 3(d) of Subsidiary Legislation 123.26 must not take into consideration such an allowable NID deduction.