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Guidelines On Profit Participating Loans
The International Tax Unit of the Inland Revenue Department has issued guidelines on Profit Participating Loans (PPLs). Following the recommendation by the EU Code of Conduct Group concerning Profit Participating Loans (PPLs), ECOFIN has subsequently approved this recommendation. Taxand Malta highlights the details of the guidelines.
A hybrid loan arrangement is a financial instrument that has characteristics of both debt and equity. In as far as payments under a hybrid loan arrangement are qualified as a tax deductible expense for the debtor in the arrangement, member states shall not be exempt from such payments as profit distributions under a participation exemption.
Malta is committed to abide by it and the Commissioner of Inland Revenue has issued a guideline which reads as follows:
Interest is chargeable to tax under the Income Tax Act. Interest received from sources situated outside Malta is taxable in Malta and does not benefit from an exemption related to income from participating holdings under the Income Tax Act or under any other law.
It is being clarified that income from a loan, including one which is both debt and equity e.g. where the lender is entitled to voting rights, to profits etc. shall be considered to be interest for the purposes of the Income Tax Act and is not considered to be income from share capital or from an equity holding for the purposes of the Act.