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Notional Interest Deduction (NID)

Corporate entities (including permanent establishments of foreign companies in Cyprus) will be entitled to a Notional Interest Deduction (NID) on new equity which has been introduced to a business on or after 1 January 2015. The NID aims to reduce corporate debt and encourage new equity. New equity may be contributed in cash or in assets in kind (at their market value).

The annual NID deduction is calculated as an interest rate on the eligible share capital based on the yield of the 10-year bond of the country in which the funds are employed plus a 3% premium as at the last day of the previous tax year. The minimum allowable rate is the yield of the Cypriot 10-year bond plus a 3% premium.

The tax deductibility of NID follows the same principles of normal interest expenses i.e. for financing of most business assets. Another important provision is that the NID cannot exceed 80% of the taxable profit as calculated before allowing the NID and is not available at all if the company is in a loss position. Consequently, any unutilised NID cannot be carried forward to future periods.

There are however important anti-abuse rules which deny NID deductibility. New equity which derives from share capital and/or share premium that existed on 31 December 2014 is excluded:

  1. New equity which derives from asset revaluations is excluded.
  2. New equity which emanates from reserves existing at December 31, 2014 is restricted unless the new equity is financing new business assets
  3. NID deduction will be available only to one company in cases where the new equity of a company is derived directly/indirectly from the new equity of another.
  4. If the new equity of a Cyprus company derives directly or indirectly from funds on which another company has claimed interest expense deduction in Cyprus then the notional interest deduction is reduced by the amount of the interest expense claimed.
  5. Companies benefiting from the reorganisation provisions of the tax law will have their new equity calculated as if the reorganisation had not taken place.