Cyprus Powerful Tax tool The Notional Interest Deduction (NID)
Cyprus corporate lawyers G. KOUZALIS LLC, we are very excited to advise that Cyprus government introduced the Notional Interest Deduction (NID) as a powerful tool to enhance the competitiveness of its tax system and attract investment into Cyprus-based companies.
The NID aims to:
- Reduce reliance on debt financing by encouraging equity injections.
- Offer tax benefits comparable to those of debt financing, thus leveling the playing field between debt and equity.
This incentive is available to all Cyprus tax-resident companies and permanent establishments in Cyprus.
NID in Practice
- Effective from: 1 January 2015.
- Nature: A tax-deductible notional expense, similar to interest on debt, applied to new equity financing.
- Purpose: To reduce taxable income, encouraging equity over borrowing.
- Key Limitation: The deduction cannot exceed 80% of the company’s taxable profit in a given year.
- Calculation:
NID=New Equity×Reference Interest Rate\text{NID} = \text{New Equity} \times \text{Reference Interest Rate}NID=New Equity×Reference Interest Rate
- Note: No actual payment of interest is required; the deduction is purely notional.
New Equity
- Definition:
- Paid-up share capital and share premium introduced on or after 1 January 2015.
- Contributions can be in cash or in-kind (assets, limited to their market value).
- Exclusions:
- Equity existed before 31 December 2014.
- Revaluation reserves from movable or immovable property.
- Capitalization of Existing Loans:
- Conversion of loans (including back-to-back loans) into share capital qualifies as new equity for NID purposes.
Reference Interest Rate
The reference interest rate used for NID is the higher of:
- The yield of the 10-year Cyprus government bond (as at 31 December of the previous year) + 3%, or
- The yield of the 10-year government bond of the country where the new equity is invested (as at 31 December of the previous year) + 3%.
NID Examples
| Example | 1 | 2 | 3 | 4 |
| A. New Capital | €500,000 | €1,000,000 | €1,000,000 | €100 |
| B. Interest Yield | 8% | 10% | 8% | 10% |
| C. NID Before Cap (A × B) | €40,000 | €100,000 | €80,000 | €10,000 |
| D. Taxable Profit | €100,000 | €100,000 | €100,000 | €0 (Exempt) |
| E. 80% of Taxable Profit | €80,000 | €80,000 | €80,000 | N/A |
| F. NID (Lower of C & E) | €40,000 | €80,000 | €80,000 | €0 |
Key Advantages of NID
- Can reduce effective corporate tax rates to as low as 2.5%.
- Eliminates the need for offshore financing structures.
- Grants equity financing the same tax treatment benefits as debt financing.
- Can be combined with other Cyprus tax incentives (e.g., Non-Dom regime, IP Box).
Our Services
We can:
- Advise on the effective use, scope, and limitations of NID.
- Assess anti-avoidance provisions relevant to your structure.
- Review existing company structures for optimization.
- Provide tailored tax planning strategies to maximize benefits.
Please contact Cyprus international lawyers G. KOUZALIS LLC for further information.
Disclaimer: This article is provided for informational purposes only and does not constitute legal advice. Readers are advised to consult with legal professionals for advice specific to their individual circumstances.