The Notional Interest Deduction (NDI), is a new powerful tool provided to local and international businesses which enables them to deleverage and realise a tax efficient return on new (qualifying equity).
The result may be a notional interest expense in Cyprus with no corresponding income elsewhere!
Cyprus introduced provisions to allow notional deduction of interest in cases where funds are introduced to the company in the form of equity instead of interest bearing or interest free loans.
Main provisions:
1. Deemed interest deduction is allowed on “new equity” funds introduced into a Cyprus tax resident company and which funds are used for the operationsof the company.
2. The return is achieved through the deduction of a “notional” interest expenses from the taxable income. The NID effective tax rate is 2,5% (20*12,5%). The NID is deducted following the determination of a company’s taxable profit. Obviously, in the year of tax loss such a benefit will be lost.
3. The deemed interest is calculated on the basis of a “reference interest rate”. This rate is equal to the yield on the 10 year Government Bond of the country where the new funds are invested, plus 3%, with the minimum rate being the yield on the 10 year Government Bonds of Cyprus (currently around 5%), plus 3%.
Example:
Net profit €200.000
Less: Notional interest deduction
8% (5% plus 3%)*€1.000.000 €80.000
Net taxable profit €120.000
Tax payable €120.000*12,5% €15.000
The deduction cannot exceed 80% of the taxable profit of the Company.
4. New equity means any equity funds introduced into the business after 1 January 2015, but do not include capitalization of reserves resulting from the revaluation of movable and immovable property.
5. Equity includes both share capital and share premium (ordinary or preference), to the extent that it has been actually paid.
6. The consideration for the issue of the shares can also be assets (other than cash) in which case the consideration cannot exceed the market value of the assets contributed (the valuation satisfaction of the Tax Commissioner).
7. The deductibility of the deemed interest will be subject to the same rules as actual interest paid, i.e. will be tax deductible only if it relates to assets used in the business.
8. Claiming the notional interest is at the discretion of the tax payer on a year by year basis, so, if not beneficial, the taxpayer can avoid the claim.
From our member in Cyprus : Papademetriou & Partners