Notional Interest Deduction Rules: Guidelines Update

The first update to the NID Guidelines clarifies that approval by the shareholders or partners for the undertaking to claim the NID must be given by the earlier of:

• the date on which the said undertaking files its income tax return for that particular year of assessment; or 
• 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. 

Moreover, such approval must be given in respect of the year of assessment in which a claim for NID causes an actual reduction in the total income, and not when the undertaking becomes entitled to claim the NID.
 
The updates to the Guidelines further clarify that the criteria based on which the Commissioner may exercise his discretion in terms of Rule 5 (3), providing for an alternative allocation of the deemed interest income, other than upon the nominal value of the risk capital held by the shareholder/partner, shall be published as part of the Guidelines and any decision of this sort taken by the Commissioner shall, where applicable, may 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 relates to NID claimed against foreign-sourced rental income which falls within the purview of Article 4 (1) (e) of the Income Tax Act, as regulated by the Deduction of Expenses in respect of Immovable Property Rules, Subsidiary Legislation 123.26. It was clarified that where an undertaking derives foreign-sourced rental income which falls within the purview of article 4 (1) (e) of the Income Tax Act, that undertaking is also eligible to claim a notional interest deduction in respect of risk capital employed in acquiring the said income when determining the amount chargeable to income tax in Malta, in terms of Subsidiary Legislation 123.26. The NID allowable as a deduction must not be taken into consideration when determining the 20% further deduction provided for in sub-rule 3(d) of Subsidiary Legislation 123.26.

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