Cyprus Notional Interest Deduction (NID): How It Works in 2026

Cyprus Notional Interest Deduction (NID): How It Works in 2026

The Notional Interest Deduction (NID) is a significant instrument available to both domestic and foreign companies that allows them to deleverage and realize a tax-efficient return on new (qualified) equity. This return is obtained by deducting a “notional” interest charge from their taxable income.

As a result of the NID, Cypriot enterprises may now attain effective tax rates of up to 3%, making equity financing a viable alternative to debt financing.

Why Cyprus Introduced the NID Regime

• Investments requiring a large amount of capital are encouraged in Cyprus. Cypriot enterprises can now be utilized as finance, central procurement, and factoring centers for multinational firms thanks to the establishment of the NID.
• Alignment of the tax treatment of equity and loan financing. Prior to the establishment of the NID, debt financing was normally tax deductible, whereas equity funding was not.
• Small and medium-sized companies will benefit from greater support.

 

Who Can Claim NID in Cyprus?

Cyprus tax resident companies and the Cyprus permanent establishments of non-Cyprus tax resident companies.

How the Cyprus NID Works in Practice

The NID is deductible in similar manner that actual interest expense is (that is, only if it is used to finance the majority of corporate assets).
Following the determination of a company’s taxable earnings, NID is deducted. The deduction cannot exceed 80% of the Company’s/permanent establishment’s taxable earnings (calculated prior to NID).

Since this NID is a “notional” deduction, no cost or exchange of funds is required for the NID to apply.

What Qualifies as New Equity for NID Purposes?

New equity for the purposes of the NID means equity contributed as from 1 January 2015 in the form of paid up share capital or share premium. It can be provided in both cash and kind.

In the event of assets in kind, the amount of additional equity cannot exceed the asset’s market value, which must be demonstrated. Existing reserves as of 31 December 2014 do not qualify as new equity for NID purposes.

How the NID Reference Rate Is Calculated

The NID rate is the yield on the 10-year government bonds (as at 31 December of the year preceding the tax year the NID is claimed) of the country where the funds are employed in the business of the company, plus a 5% premium.

The Cyprus Tax Department announces the 10-year government bond yield rates for a number of countries as at 31 December of the year preceding the relevant tax year. These rates, when increased by 5%, can be used as reference rates for calculating Notional Interest Deduction (NID) for the relevant tax year.

Key Advantages of the Cyprus NID Regime

• Can be combined with other incentives provided for under Cypriot laws (e.g. intellectual property regime – IP BOX),
• Similar benefits to debt financing,
• Companies can maintain tax benefits while increasing their financial stability.

Important Note on NID and the Cyprus IP Box Regime

Income from non-qualifying intangible assets for companies using the IP BOX regime in Cyprus: Income arising from non-qualifying intangible assets that are used in the company, can still benefit from certain provisions of the Cyprus tax law. In particular, NID may be available to be deducted from such income, which should help reduce the overall effective tax rate of the company. Examples of such intangible assets include trademarks, copyrights and other IP assets.

NID Practical Examples

Illustrative examples only: the actual NID available depends on the applicable reference rate, the use of the new equity, and the taxable profit position of the company in the relevant tax year.

Practical Example 1 – Cyprus operating company funded with new equity

A Cyprus tax resident company receives EUR 1,000,000 of new equity from its shareholder and uses the funds in its business operations. Assuming the applicable NID reference rate for the relevant tax year is 8%, the company may claim a notional deduction of EUR 80,000. If the company’s taxable profit before NID is EUR 300,000, the full deduction may be available, reducing taxable profit to EUR 220,000. At a 15% corporate income tax rate, the tax payable would be reduced accordingly.

Practical Example 2 – 80% limitation in practice

A Cyprus company introduces EUR 5,000,000 of qualifying new equity and uses it for income-generating business purposes. Assuming the applicable NID reference rate for the relevant tax year is 8%, the calculated NID would be EUR 400,000. If the company’s taxable profit before NID is EUR 350,000, the full EUR 400,000 cannot be claimed, because the deduction is capped at 80% of taxable profit. In this case, the maximum available NID would be EUR 280,000, and the remaining taxable profit would be EUR 70,000.