Government Submits Bill to Tighten Thin Capitalisation Rules
The Government submitted a bill to the People’s Majlis on 18 October 2026 proposing the Third Amendment to the Income Tax Act 1. The Bill only amends Section 71, the thin capitalisation rule. If passed, the amendments will take effect from 1 January 2027 and apply in computing taxable income for the 2027 tax year onwards.
The bill makes two key changes to thin capitalisation rule. First, it reduces interest capacity from 30% to 25% of tax-EBITDA returning to the cap that applied when MIRA first introduced the rule by tax ruling in 2018. Second, it repeals the current mechanism that lets interest above interest capacity be carried forward and deducted in later periods for up to 10 years. As a result, interest disallowed under the thin capitalisation rule would be permanently forfeited rather than just deferred. The scope of the rule is unchanged, so interest paid to foreign banks and financial institutions remains within it; only interest paid to banks and certain financial institutions licensed in the Maldives is excluded.
The Ministry of Finance’s estimate accompanying the bill projects around MVR 496 million in additional income tax revenue in the first 12 months, based on 2025 tax return data.
The impact would be greatest on large, debt-financed developments, such as resorts financed with offshore borrowing. During construction and the pre-opening, these projects usually generate little or no tax-EBITDA and in their early operating years interest costs are typically high relative to earnings. Under the current rules, interest disallowed in those years can be deducted as the business matures, within the 10 year limit. Under the proposed rules, it would be permanently lost, leaving these businesses unable to deduct a significant part of their actual financing costs. This raises the effective tax burden on long-term investments at the stage when they are most financially vulnerable.
The bill also contains no transitional provision for interest already carried forward at 31 December 2026. Once the carry-forward provisions are repealed, these accumulated balances may become permanently non-deductible, which would also penalise businesses for interest they incurred under the existing rules.
