The Cyprus Tax Department published on 3 February 2022 the bond yield rates per country as at 31 December 2021 to be considered for the Notional Interest Deduction (NID) to which equity injected in to Cyprus companies is entitled for 2022. The rates can be found on the website of the Cyprus Tax Department by clicking here.
It is reminded that equity introduced to a company as from 1 January 2015 (new equity) in the form of paid-up share capital or share premium is eligible for an annual NID. The deduction is calculated as a percentage (reference rate) on the new equity. The relevant reference rate is the yield of the 10 year government bond (as at December 31 of the previous tax year) of the country where the funds (the new equity) are invested in the business of the company, plus a 5% premium.
Based on clarifications received from the practical implementation of the relevant legislation behind NID, the capitalization of existing liabilities, including back to back arrangements, obtained by a Cyprus company qualifies for the purposes of the notional interest deduction.
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.