Background: Cyprus Companies
The reputation of Cyprus as an international financial centre has grown significantly over recent years. Cyprus is an attractive jurisdiction for trading and holding companies and offers a number of tax incentives.
The corporate tax rate in Cyprus 12.5%, which is amongst the lowest in Europe. Another feature is that Cyprus companies are not subject to Capital Gains Tax. In addition, Cyprus has over 60 double tax treaties to assist with international tax structuring, finally, as a member of the EU, Cyprus has access to all European Union Directives.
A company that is managed and controlled from Cyprus is considered to be tax resident in Cyprus.
What is Notional Interest Deduction and When Does it Apply?
Cyprus tax resident companies and Cyprus permanent establishments (PEs), of non-Cyprus tax resident companies, are entitled to a Notional Interest Deduction (NID), on the injection of new equity used to generate taxable income.
NID was introduced by Cyprus in 2015, to reduce discrepancies in the tax treatment of equity financing compared to debt financing, and to promote an incentive for capital investment in Cyprus. NID is deductible, in the same manner as interest expenses, but it does not trigger any accounting entries as it is a ‘notional' deduction.
What Tax Advantages are Available Through the Use of Notional Interest Deduction?
NID is deducted from taxable income.
It cannot exceed 80% of the taxable income, as calculated prior to Notional Interest Deduction, arising from the new equity.
- A company could therefore achieve an effective tax rate as low as 2.50% (income tax rate 12.50% x 20%).
Initially, the NID rate was defined as; the 10 year government bond yield, as at 31 December of the year preceding the tax year the NID is claimed, of the country in which the new equity was employed, plus a 3% premium. This was subject to a minimum rate equal to the yield of the 10 year Cyprus government bond plus a 3% premium.
- Since January 1, 2020 the NID rate has been defined as; the interest rate of the 10 year government bond yield of the country in which the new equity is invested, as published annually, plus a 5% premium. The interest rate of the Cyprus 10 year government bond will no longer be used as a general minimum rate. It is only deemed to be relevant, when the country in which the new equity is invested has not issued any government bonds, as of 31 December the year preceding the tax year the NID is claimed.
Additional Information Regarding the Taxation of Companies in Cyprus
The following sources of income are exempt from corporate income tax:
- Dividend income
- Interest income, excluding income arising in the ordinary course of business, which is subject to corporation tax
- Foreign exchange gains (FX), with the exception of FX gains arising from trading in foreign currencies and related derivatives
- Gains arising from the disposal of securities.
All expenses incurred wholly and exclusively in the production of income are deductible when calculating taxable income.
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.