The Tax Department has issued guidance on the application of the
provisions introduced in 2015 for a notional interest
deduction.(1) A notional interest deduction is
available for new equity capital introduced into companies and
permanent establishments in Cyprus from the beginning of 2015 to
finance business assets.(2) It is calculated with
reference to government bond rates and is limited to 20% of the
profit before the notional interest deduction.
The guidance sets out the legal basis for the notional interest
deduction and explains the underlying concepts, definitions and
basic principles of calculating the deduction and its application
in practice, with worked examples illustrating various hypothetical
scenarios. The guidance also clarifies a number of issues which had
not previously been considered in detail, the most important of
which are outlined below.
A permanent establishment's capital will be calculated as
the average of the balance of the financing for its operating
activities in the assessment year and does not include balances
from current accounts between the company and the permanent
establishment resulting from commercial or short-term financial
The 20% limit on a notional interest deduction from a capital
injection is calculated by reference to the income stream from the
specific assets financed by the injection according to the matching
accounting principle, using the same methodology and practice used
to calculate allowable interest and expenses.(3)
The same methodology and practice should also be used to apportion
adjustments that the Tax Department makes after the examination of
tax returns (eg, the adjustment of profits or losses on
transactions between related parties).
Where new capital is provided by converting a loan to equity,
the new equity will be deemed to finance the same assets that were
funded by the loan.
If the new capital derives from capital introduced into another
company or permanent establishment, only one of the companies or
permanent establishments can claim a notional interest deduction,
except where the reinvestment of the new capital creates new
separate taxable income. Similarly, if the new capital derives from
loans on which a tax deduction is claimed for interest, the
notional interest deduction will be reduced by the amount of
interest allowed as a deduction.
If a company transfers its tax residence to Cyprus after January
1 2015, its total paid-up share capital and share premium at the
date of transfer will be treated as new capital for calculation of
the notional interest deduction. In the case of companies
registered overseas, a notional interest deduction will be allowed
only to the extent that the legal status of the company's
capital is equivalent to that under Cyprus law.
No notional interest deduction is available for new share
capital arising from the capitalisation of pre-existing reserves,
unless the taxpayer can demonstrate that the old reserves:
were previously invested in specific
assets not used in an activity that produced taxable income;
have subsequently been converted into
new assets used for the purpose of producing taxable income.
If new capital is introduced in kind – in the form of
assets – an independent valuation or equivalent evidence (eg,
market reports if there is an active open market for the type of
asset concerned) will be required to substantiate the value
attributed to the assets.
As an overriding principle, no notional interest deduction will
be allowed if the tax authorities believe that:
the main purpose of the underlying
transactions was to reduce tax liability; and
there was no substantial economic or
(1) Circular 2016/10 dated July 18 2016, Interpretation
and tax practice for the new Section 9B of the Income Tax
(Amendment) Law of 2015 on notional interest deduction.
(2) For further information please see "Amendment to
(3) Set out in Circulars 2008/14 and 2010/8.
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Despite the Supreme Court limiting the circumstances in which a court could set aside a trustee's flawed exercise of power in Pitt v Holt, Futter v Futter, a number of offshore jurisdictions have declined to follow.
On 11 April 2016, following the "Panama Papers" disclosures, the UK Government announced that it was bringing forward its plans to introduce legislation designed "to hold companies who fail to stop their employees facilitating tax evasion criminally liable".
CIMA released a Statement of Guidance on Professional Indemnity Insurance for Trust, Insurance, Mutual Fund Administrator, Securities Investment Business and Company Management Licensees and Directors.
The message from the Hong Kong Monetary Authority that banks must do more to cater to foreign start-ups and small and medium-sized businesses has been welcomed by the head of Ogier's Corporate Practice in Hong Kong.
This September sees the latest extension to the Discrimination (Jersey) Law 2013 (Law), with the addition of age as a protected characteristic.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).