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 2.5%, making equity financing a viable option to debt financing.
Idea and purpose
- 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 is eligible?
Cyprus tax resident companies and the Cyprus permanent establishments of
non-Cyprus tax resident companies.
How does it work?
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.
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 can only be deemed new equity if they are utilized to fund new company operations.
The NID rate is the yield on the 10 year government bonds (as at 31 December 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 3% premium. This is subject to a minimum of the yield on the 10-year Cyprus Government bond (specified same as above) plus a 3% premium.
The Cyprus Tax Office announced the 10-year government bond yield rates for a number of countries as at 31 December 2020. These rates, when increased by 5%, can be used as reference rates for calculating Notional Interest Deduction (NID) for the year 2021.
- 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.
Income from non-qualifying intangible assets for companies using the IP BOX regime: 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.