Equity versus Debt when financing a start-up in Malta

“Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.” – Peter Drucker.

In the setup stage, enterprises need cash to invest in the assets (physical, intellectual) and human capital that will eventually generate the profits of the enterprise. Without a well-planned cash strategy that establishes how the business is to be funded and provides for contingencies, few enterprises manage to make it past the first year.   

When financing the start-up stage, it is essential to consider whether it is better to utilise debt or equity to inject funds in the enterprise. From a tax perspective, debt gives rise to interest that is generally treated as a tax deductible expense. On the other hand, equity rewards the shareholders with a dividend, which are deemed to be a distribution of profits and thus no tax deduction is granted for the dividend payout. 

From the perspective of the investor, whereas interest income is nearly always treated as a taxable income in the jurisdiction of the lender, when structured properly, some countries grant an exemption from tax on dividend income. The trade-off between the two necessitates proper planning and knowing what recurring returns will be derived and your exit is as crucial as knowing your entry, whether dealing in stocks, real estate, or startups.

Debt versus Equity in a cross border setup: The Maltese Perspective

The Maltese entity as the Investee 

Malta, like the vast majority of other jurisdictions, grants a tax deduction for interest on loans that are used in the production of income. Moreover, interest paid to non-resident persons is exempt from any withholding tax in Malta. 

Whereas dividend payments are not tax deductible, profit distributions are an essential component of the Maltese refundable tax credit system as they enable the request for the tax refund that reduces the effective tax leakage in Malta. Similarly to interest, there is no Maltese withholding tax on dividend payments. 

More importantly, Malta is one of the few countries that offer a tax deduction to incentivise the use of equity (including retained earnings and interest free shareholders loans) to finance Maltese companies. This deduction is equivalent to a notional interest on the equity components (and not related to the dividend payments which effectively, through the reduction of retained earnings, reduce the available notional deduction). 

The Notional Interest Deduction (NID) rules aim to neutralise the tax advantage that would otherwise prevail when financing companies via debt. The NID is computed on the risk capital and the annual deduction is equal to the twenty-year yield on Malta Government Stocks (3.90% as at 30^th September 2025) plus a further 5% (meaning a NID rate of 8.90% as at the date of this article). The annual NID deduction is capped at 90% of the chargeable income, but it can be combined with the refundable tax credit system to ensure tax optimisation.

The Maltese entity as the Investee 

On the other hand, Maltese companies can be used as efficient vehicles to channel investments via either debt or equity, or a combination thereof in related parties. Through the refund mechanism, the effective tax rate on the interest income of the Maltese company can be reduced significantly. Moreover, Malta adopts a participation exemption (subject to anti-abuse provisions) on dividend income from shareholdings of 5% or higher, thereby leading to the choice of a Maltese corporate entity as an investment holding jurisdiction.

Our multi-disciplinary teams at Quazar can help you with ensuring that your Maltese operations are set up in an optimal manner from the inception and that you are always a step ahead in maintaining a healthy cashflow in the business. 

Get in Touch:

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Josef Mercieca

jmercieca@quazar.mt / +356 2388 4600