Notional Interest Deduction (NID) on New Equity

Cyprus introduces provisions to allow notional deduction of interest (NID) in cases were funds are introduced to the company in the form of equity instead of interest bearing or interest free loans.

Deemed interest deduction will be allowed on new equity funds introduced into a Cyprus tax resident company and which funds are used for the operations of the company. The deemed interest will be calculated on the basis of a reference interest rate, which is equal to the yield on the 10 year government bond of the country where the new funds are invested, plus 3% or the Cyprus government bond yield (currently around 5%) plus 3%, whichever is higher.

New equity refers to any equity funds introduced into the business after 1 January 2015 and includes both share capital and share premium to the extent that it has been actually paid.

New equity may be contributed in cash or in assets in kind. In the case of assets in kind, the amount of new equity may not exceed the market value of the asset, as agreed with the tax authorities.

The notional interest to be deducted cannot exceed 80% of the taxable income of the company for the year before the deduction of the notional interest expense.

The deductibility of the interest expense depends on whether the funds for which the interest is paid have been used to finance taxable operations of the company.

Notional interest anti-avoidance

In order to tackle possible abuse of the NID, the commissioner may not authorize the granting of any allowances under the provision of this sections, if he considers that actions or transactions have taken place without substantial economic or commercial purpose, or that new capital for which a claim for allowances were derived from capital existed prior to 1st January 2015 and which are presented as new capital through actions or transactions with related parties with the main purpose of the granting of the allowance provided for in this section.

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