IN413 - The Cypriot Notional Interest Deduction Regime and How It Can Be Of Benefit

Cyprus has introduced a Notional Interest Deduction (NID) in relation to new equity capital. This is effectively a tax allowable deduction against the taxable profits of a company.

The change in law makes the tax treatment of equity finance the same as that for finance by borrowing. A key benefit of this change is that a parent company injecting capital will not receive interest from the funds invested in its subsidiaries, instead it will receive dividends. Any previous beneficial ownership issues that might have arisen regarding the interest received will therefore be eliminated.

The Notional Interest Deduction Regime

NID has been granted on new equity funds introduced into Cyprus tax resident companies and used for their operation since 1 January 2015.

The following provisions apply:

  • New equity includes both share capital and share premium (ordinary or preference) provided that these are fully paid.
  • New equity can be contributed in cash or assets in kind. In the case of assets in kind, the amount of new equity cannot exceed the market value of the asset(s).
  • The deductibility of the deemed interest is subject to the same rules as actual interest i.e. it is only tax deductible if it relates to assets used in the business.

What is the Notional Interest Deduction Based Upon?

  • Deemed interest is calculated on the basis of a “reference interest rate” equivalent to the yield on the 10 year government bond of the country where the new funds are invested, plus 3%.
  • The deduction cannot exceed 80% of the taxable income of the company for the year before the deduction of the notional interest.

Anti-Avoidance Rules

A number of anti-avoidance provisions are included in the legislation. The Dixcart office in Cyprus can provide you with comprehensive details of these provisions.

An Example of the Benefits that the Notional Interest Deduction Regime Offers

A parent foreign company injects new equity into its Cyprus subsidiary and the equity is used by the Cyprus company to finance other associated foreign companies:

  • New equity introduced: €10m
  • Loans advanced: €10m
  • Interest rate charged: 10%
  • Cyprus 10 year government bond rate: 5.5%

Relevant Corporation Tax in Cyprus

Interest/Taxable income: €10m X 10% = €1,000,000

Notional Interest Deduction:

(5.5%+3%) X €10m = €850,000 but cannot exceed 80% X €1,000,000 = €800,000

Therefore

Taxable Income:                             

€1,000,000

(Less)

 

Notional Interest Deduction:        

 (€800,000)

Net income:                                    

  €200,000

Corporation tax @ 12.5%:              

    €25,000

Effective tax rate:               

          2.5%

Summary

Application of NID in this example has reduced the rate of corporation tax from 12.5% to 2.5% and generated a tax saving to the company of €100,000.

Additional Information

If you require additional information regarding the Notional Interest Deduction regime, please contact Robert Homem at the Dixcart Office in Cyprus.

Categories: Jurisdiction, Cyprus, Year, 2016