- Notional Interest Deduction utilized and applied effectively can substantially lower a Cyprus company's tax burden.
- Cost of equity financing is now tax deductible through the NID benefit.
- Achieve an effective tax rate of 2.5% instead of 12.5%.
What is Notional Interest Deduction?
It is deemed interest applied on 'new equity' injected into a company. It enables eligible companies to claim a tax deduction on new capital (equity) introduced into the company. A 'notional' interest expense is deducted from the company's taxable income. This means that properly managed and structured a company's corporation tax duty can be dropped from 12.5% to as low as 2.5% making the company a substantial saving in corporation tax.
What is considered 'New Equity'?
It is equity that is represented by the following types of shares, irrespective of class: -
- ordinary shares
- preference shares
- redeemable shares
- convertible shares
'New Equity' does not include: -
equity that was introduced in the business on or after 1/1/2015 and which emanated directly or indirectly from reserves that existed as at 31/12/2014 unless the new equity is used to finance new business assets.
Who is eligible?
Cyprus tax resident companies, and
Cyprus permanent establishments of companies which are not Cyprus tax residents.
Why was it introduced into Cyprus tax legislation?
To promote capital-intensive investments in Cyprus.
Increase the benefits of the use of Cyprus tax resident companies in international groups by using the Cyprus company in financing structures, as central procurement and as factoring centres.
To support in the development of small and medium-sized businesses.
To align the tax treatment of equity finance with the tax treatment of debt finance.
How is it calculated?
The NID is calculated by multiplying the 'New Equity' by the 'Reference interest rate'.
How is the Reference Interest rate determined?
It is the yield of the 10-year government bond of the state in which the new equity is invested in, increased by 3%, as at 31st December of the previous tax year.
When is it granted?
The NID is granted for the period within the tax year during which the 'new equity' belonged to the business. The NID can be set against the income generated by the company in the specific tax year.
Who can benefit practically?
International investors, in particular international financial companies who decide to invest through lending their own funds mainly due to the lack of alternative borrowing options. These companies may now claim a notional interest deduction from their taxable income.
The use of the 10-year government bond yield in determining the Reference Interest Rate is an economic reality, where the commercial circumstances are taken into consideration, for example an investor who introduces capital in investments in Russia will be able to get a tax deduction based on the Russian 10-year government bond yield.
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.