As has been announced by the Minister for Finance in his 2017 Malta Budget Speech, the Notional Interest Deduction (NID) was introduced through specific Rules, effective as from year of assessment 2018. The Rules aim to approximate the tax treatment of equity with that of debt.
In the presentation of the 2017 Malta Budget, the Minister for Finance announced the introduction of the Notional Interest Deduction (NID), which aims to approximate the tax treatment of equity with that of debt.
NID was introduced by means of legal notice 262 of 2017 published on 5 October 2017. NID came into force with effect from year of assessment 2018.
Paradoxically corporate income tax systems usually discriminate between the different sources of finance. They favour debt over equity financing: return (interest) on debt is deductible for tax purposes whereas the return on the equity is not, yet the latter is the riskier of the two. This unequal treatment could be the cause of certain problems such as excessive leverage and an increased vulnerability to economic crises, disadvantages for firms with restricted access to external funds and profit shifting incentives.
NID was introduced to achieve an equal treatment of debt and equity financing, by granting an additional deduction for the return on equity financing.
Apart from approximating the debt to equity tax treatment by providing a notional interest deduction on equity, the NID may simplify matters within Malta’s full imputation system in view of the resulting reduction in the imputation credits resulting from claiming the NID.
© 2017 KPMG, a Malta civil partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.