An amending Income Tax Law (ITL) has been drafted with respect to Notional Interest Deduction (NID).
The revised NID provisions enhance the tax benefits for Cyprus companies financing their operations through new equity, are in line with the recommendations of the European Commission, and offer additional clarity for taxpayers.
- Reference rate
Until 31 December 2019 (pre-amendment)
The reference rate is the yield of the 10-year government bond (as at 31 December of the year preceding the tax year the NID is claimed) of the country in which the new equity is employed/invested plus 3%.
The minimum reference rate is the yield of the Cyprus 10-year government bond (as at 31 December of the relevant year) plus 3%.
From 1 January 2020 (post amendment)
The reference rate is the yield of the 10-year government bond (as at 31 December of the year preceding the tax year the NID is claimed) of the country where the new equity is employed/invested plus 5%, and there is no minimum reference rate.
Where the country in which the new equity is employed/invested does not have an issued 10-year government bond as at 31 December of the relevant year, the reference rate is the Cyprus 10-year government bond yield plus 5%.
- New equity
Until 31 December 2020 (pre-amendment)
“New equity” represents equity introduced into the business on or after 1 January 2015, excluding equity created from the capitalisation of reserves existing on 31 December 2014 (pre-existing reserves), unless the equity created from the pre-existing reserves is invested in (business) assets earning taxable income which did not exist on 31 December 2014.
From 1 January 2021 (post amendment)
“New equity” is defined as equity introduced into the business on or after 1 January 2015. Therefore, as from 1 January 2021, the NID can no longer be claimed on equity arising from the capitalisation of pre-existing reserves.
- NID cap (80% of taxable profits)
The amending law clarifies that for the purposes of calculating the NID cap, the relevant taxable profits are those arising from the employment of the new equity, so that the NID can only be claimed against such profits. It also clarifies that the cap applies separately to the taxable profits derived from each business asset that is financed by the new equity.