Fringe benefit rules in Malta tend to cater for all forms of benefits receivable by an employee or his family members from an employer, despite the lack of tangibility and obvious difficulty in quantifying them. Very few would imagine that the receipt of certain items or enjoyment of discounted prices from your employer could in actual fact merit declaration and possible payment for tax purposes.

One of the fringe benefits specifically covered in the rules relates to the provision of loans by employers to employees. Many employers provide employee loans for, among other things, private travel and healthcare, acquisition of property, deposit payments and, in some cases, proposed share acquisitions in the company or firm itself. Although these kind of loan provisions are common and do not require specific explanations regarding their use, employers and especially employees have to consider the tax consequences.

A loan is a taxable benefit in kind if it has no interest or a rate of interest below the Inland Revenue Department’s official rate, currently 8 per cent. Therefore if, for example, a company (or even a sole trader employer) lends an employee a sum of €10,000 at any point in a given tax year, the lending company would have to charge the minimum rate of interest (8%) or report it as a benefit in kind in the employee’s payslip and include it in the applicable IRD’s Fringe Benefit Form.

Should the €10,000 loan be given at an interest rate of 5 per cent, the benefit on the remaining 3 per cent, being €300, would be taxable. In the latter case, the company would probably also incur normal income taxes on the interest received.

A loan is a taxable benefit in kind if it has no interest or a rate of interest below the Inland Revenue Department’s official rate

The law also includes provisions on loans provided by the employer to the employee’s family members. Such loans still trigger the mentioned tax implications for the employee. In addition, similar arrangements involving shareholders would probably also be subject to the same implications.

Often underestimated is the provision of loan arrangements at beneficial terms offered by banks or licensed financial institutions to employees thereof. Although not at a completely 0 per cent rate, such loans are often offered at rates much favourable than those offered to the public. In this respect, the standard 8 per cent benchmark rate is lowered to the main refinancing operations rate of the Central Bank of Malta.

Similarly, any value of underpaid interest would need to be declared for tax purposes. This notwithstanding, being a form of benefit constituting part of the bank’s normal business activity, a value equivalent to €700 could be deducted from the ascertained fringe benefit value.

There must be a clear distinction between loans given to employees and donations given on purely personal considerations, which are generally excluded from fringe benefit rules and requirements. On the other hand, in the former case, it is important to make a loan agreement with your employee to protect the company’s interest. Ideally, there should also be an agreement on a salary deduction to provide for the repayments.

bgriscti@ksimalta.com

Benjamin Griscti is a manager for tax services at KSi Malta.