A loan can be one of the simplest ways to move funds into, out of or between companies. It can also create unexpected tax exposure when the commercial purpose, interest rate or repayment terms exist only in someone’s head.
The common assumption is: “It is only a loan, so it is not taxable.”
The principal itself is normally not income. But almost everything around it can have tax consequences: the interest charged, the use of the borrowed funds, the relationship between the parties, the country of the lender and even what happens if the loan is never repaid.
First question: who is lending to whom?
“Corporate loan” can describe very different transactions:
- A shareholder lends money to a Malta company
- A Malta company lends money to its shareholder or director
- One group company finances another
- A Malta company borrows from a bank or an unrelated investor
- A Malta company acts as the lender and earns interest
The tax treatment is not the same in each case. Before funds move, the transaction should be classified correctly and supported by a proper loan agreement.
Can the company deduct the interest?
Interest is not deductible simply because the borrower is a company.
A Malta company must be able to show that the borrowed capital was used in producing its taxable income. If the loan finances stock, equipment, business expansion or another genuine income-producing activity, the link may be clear.
If the money is redirected to a shareholder, used for private expenditure or left idle without a commercial reason, the deduction may be challenged.
This is why tracing the use of funds matters. The agreement, bank transfers, board minutes and accounting records should all tell the same commercial story.
Larger financing structures must also consider Malta’s interest-limitation rules. Broadly, exceeding borrowing costs may be restricted to 30% of tax EBITDA, although a €3 million threshold and specific exclusions or exceptions may apply.
Commercially valid interest expense is therefore not automatically deductible in full.
Related-party loans must look commercial
Loans between connected companies deserve particular attention. They should be priced and documented as if the parties were independent.
That means considering:
- The amount and currency of the loan
- The borrower’s creditworthiness
- A defensible interest rate
- Maturity and repayment schedule
- Security or guarantees
- Subordination and other lender protections
- What actually happens if the borrower misses a payment
Malta’s transfer-pricing rules generally apply to relevant cross-border arrangements between associated enterprises for basis years starting on or after 1 January 2024, subject to their scope, thresholds and transitional provisions.
An interest-free loan is not automatically risk-free. Where the arm’s-length principle applies, the tax result may be adjusted by reference to the interest that independent parties would have agreed, even if the contract says 0%.
Equally, adding an arbitrary interest rate is not enough. The company should be able to explain how the rate was reached and why the borrower could realistically service the debt.
A loan to a shareholder or director is a different risk
When a Malta company advances money to an individual behind the business, the issue is wider than tax.
Malta’s Companies Act generally prohibits a company from making a loan to its director, or to a director of its parent company, subject to limited statutory exceptions.
Depending on the facts, a payment may also raise questions about private expenditure, fringe benefits, disguised remuneration and the correct treatment in the company’s accounts.
Calling the payment a “director’s loan” in the ledger does not resolve these issues. The legal basis, approvals, repayment capacity and actual repayments should be reviewed before the company transfers the funds.
What if a Malta company earns the interest?
Interest received by a Malta company is taxable income. It does not become exempt holding income simply because the loan is convertible, profit-linked or connected to shares.
The distinction between passive interest and interest derived from an active trade can materially affect Malta’s shareholder tax refund.
Subject to the applicable conditions, distributed trading profits may qualify for a 6/7 refund, producing an effective Malta tax rate of 5%.
Passive interest generally falls under the 5/7 refund, producing an effective rate of 10%. A different refund mechanism may apply where double-tax relief has been claimed.
The classification depends on the real activity, not the label used in the contract. A company does not become an active financing business merely because it has issued more than one loan.
Is withholding tax due when interest leaves Malta?
Malta generally exempts interest paid to a non-resident lender from Maltese tax where the statutory conditions are satisfied.
In a straightforward qualifying case, this normally means no Maltese withholding tax on the outbound interest.
However, “no withholding tax in Malta” is not the end of the analysis.
The lender’s country may tax the interest, impose reporting obligations or question whether the lender is the beneficial owner. The position can also change where the debt is connected with a Malta permanent establishment or the structure is caught by anti-abuse or anti-hybrid rules.
Cross-border financing should therefore be checked at both ends of the transaction.
What happens if the loan is never repaid?
An old balance sitting in the accounts year after year is a warning sign, not a solution.
If the parties repeatedly extend the maturity date, charge no interest, ignore missed payments or eventually waive the debt, the original classification may be questioned.
A write-off can also have different tax consequences for the lender and borrower, while a deduction for a related-party bad debt should never be assumed.
The conduct of the parties should match the written agreement throughout the life of the loan.
Practical pre-loan checklist
Before transferring the funds, confirm:
- Who is the lender, borrower and ultimate beneficial owner of each party?
- What genuine business purpose does the loan serve?
- How will the borrowed funds produce income?
- Are the amount, interest rate and other terms commercially supportable?
- Do transfer-pricing rules or interest-deduction limits apply?
- Are board or shareholder approvals required?
- What are the tax and reporting consequences in the other country?
- How will interest and repayments be recorded and monitored?
- What happens in practice if the borrower cannot repay?
The safest time to review a corporate loan is before the payment
Most loan-related tax problems are not caused by the loan itself. They arise because the money moved first and the documents were prepared later.
A well-structured corporate loan should have a clear purpose, realistic terms, proper approvals and consistent tax and accounting treatment from day one.
At 1st Step, we can review the proposed financing arrangement, coordinate its Malta tax and accounting treatment and identify the documents required before the funds are transferred.
For cross-border loans, we can also work with advisers in the other jurisdiction so that both sides of the transaction are considered.
This article provides general information and does not constitute legal or tax advice. Each financing arrangement should be assessed on its specific facts.