Cyprus: Introduction Of Notional Interest Deduction (NID)

Last Updated: 15 March 2016
Article by Charles Savva

On 16 July 2015, amendments to the Income Tax Law (the Law) were published in the Cyprus Government Gazette, which followed their approval by Parliament earlier in July 2015. One of the main amendments was the introduction of the NID provisions contained within Article 9B of the Law.

  • Objective of the NID: to reduce corporate debt by increasing the attractiveness of equity from a tax perspective. Furthermore, the introduction of the NID enhances the international attractiveness of the Cyprus tax system as the effective tax rate can now be minimized from 12.5% to as low as 2.5%.
  • Who it applies to: Cyprus tax resident entities and the Cypriot permanent establishments of non-resident entities.
  • NID in brief: it is an annual tax allowable expense, calculated as a percentage of new equity introduced in a company from 1 January 2015 onwards. A company can claim this annual tax expense indefinitely until there is a share capital/premium reduction or redemption of preference shares.
  • What is "new equity": new equity is defined as new capital injections into a company, either in the form of paid-up share capital or share premium.

    New equity does not need to be paid-up in cash, but can also be paid-up via a contribution in kind (CIK). If a CIK applies, its value cannot exceed the fair market value of the asset being contributed, and such market value must be substantiated via a professional and independent valuation report.

    IMPORTANT NOTE: the NID cannot be applied to reserves existing at 31 December 2014 which were converted into new equity, unless used for the financing of business assets. For example, in the case of conversion of a Shareholder Contribution Reserve into share capital, the new equity which is created from the revaluation of assets is not entitled to the NID.
  • How is the NID rate determined: the rate of the NID is the higher of:

    1. The yield of the 10 year Cyprus government bond at the end of the previous tax year (i.e. for 2015, as at 31 December 2014) plus a margin of 3%, or
    2. The yield of the 10 year government bond in the country where the funds are employed within the business of the company, at the end of the previous tax year, plus a margin of 3%.
    As at 31 December 2014, the yield on the 10 year Cyprus government bond amounted to 5.037%, hence a minimum NID rate of 8.037% would be applicable.

    Some other equivalent rates were: India 7.86%, Russia 13.73%, Poland 2.5%, Romania 3.57% and Germany 0.54%.
  • Applicability of the NID: the NID is permitted in a similar manner when considering whether interest expense from a loan is tax deductible. Therefore, the NID can be applied when proceeds where used to finance business assets and to finance the acquisition of 100% subsidiary companies.
  • Cap on NID: the NID cannot exceed 80% of taxable profit of a given tax year, as calculated before the inclusion of the NID in the tax computation. Any amount restricted cannot be carried forward.

    Furthermore, the taxpayer has the right not to claim the whole amount of the NID (e.g. when there are unused tax losses brought forward which expire, or tax losses available from other group companies). Similar to the Cap, any unutilised amounts cannot be carried forward.
  • Anti-avoidance measures: several anti-avoidance and anti-abuse measures have been introduced in order to restrict the "non-commercial" use of the NID.

    1. In case of double tiered structures (Shareholder -> CypCoA -> CypCoB) the NID is available to only one company (either CypcoA or CypCoB).
    2. If an entity within the group has claimed in Cyprus an interest expense deduction on funds used to finance new equity, then the NID is reduced by that interest expense. For example, CypCoA borrows at 5% and uses the proceeds to inject new equity in CypCoB- CypCoB can only claim NID of 3.02% for the year 2015.
    3. Company reorganisations are ignored for the purposes of the NID.
    4. The Commissioner of Taxation may decide not to grant the NID, if:

      1. He considers that actions or transactions have taken place without substantial economic or commercial purpose, which aim at granting the NID; or
      2. The new equity, for which a claim for NID is made, was derived from capital that existed prior to 1st January 2015 and which is presented as new capital through actions or transactions with related parties, with the main purpose of granting the NID.
  • Tax Circular: the tax authorities are expected to issue a Technical Circular detailing the practical application of the NID.
  • Tax planning opportunities: there are significant tax planning opportunities arising from the introduction of the NID. Please feel free to contact one of our tax professionals at info@savvacyprus.com or c.savva@savvacyprus.com for further details and advice on how the NID can be used in your specific case.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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