The provisions of the Income Tax Law related to the Notional Interest Deduction (NID) on New Equity were amended through a law, which was published in the Official Gazette of the Republic of Cyprus on 16 June 2020. For more details about the NID you can refer to our previous newsfeeds on this. The most important amendments are presented below.
The reference rate, which is applied on New Equity in order to derive to the allowance to be deducted from taxable profits, continues to be the yield of the 10 year government bond of the country in which the where the funds (the New Equity) are invested plus a 5% premium. Previously the premium was 3% instead of 5% but there was also a minimum reference rate equal to the yield on the 10-year government bond of Cyprus plus 3%. Therefore, there is no minimum reference rate anymore, unless the country in which the New Equity is invested does not have a 10 year government bond in issue.
The definition of New Equity has been amended in order to cover only equity (in the form of paid-up share capital or share premium) introduced to a company as from 1 January 2015. The option to consider capitalisation of reserves existing on 31 December 2014 as New Equity, under certain conditions been met, is no longer available.
The NID calculated as per above is set against taxable profits on an annual basis, subject to a cap of 80% of those profits. The amending law clarifies that the relevant taxable profits are those arising from the employment of the New Equity, therefore the NID can only be claimed against such profits. It is also clarified that the cap applies separately to the taxable profits generated from each business asset financed by the New Equity. These are not new provisions but merely clarifications, of what was anyway applied in practice in the vast majority of the cases.
As we have mentioned in the past, the NID enhances the tax benefits of financing business operations through equity and offers a tax efficient alternative to debt financing, something which becomes even more attractive considering that the latter is on the spotlight by various tax-related developments, such as the BEPS project by the OECD.