On 16 June 2020, the Tax Department announced the amendments related to the application of the provisions of the Notional Interest Deduction (NID) on new equity used to produce taxable income.
|NID = New Equity X Notional Interest Rate|
(a) Notional Interest Rate
– Until 31 December 2019, the notional interest rate was 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 was the yield of the Cyprus 10-year government bond (as at 31 December of the relevant year), plus 3%.
– As of 1 January 2020, the relevant 10-year government bond yield will be determined only with reference to the jurisdiction of investment (i.e., the Cypriot yield rate will no longer serve as a minimum).
– 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.
– In case the country in which the new equity is invested has not issued a government bond on 31 December of the year preceding the tax year, the “reference interest rate” will be based on the government bond yield of Cyprus plus 5%.
(b) New Equity
– Until 31 December 2019,“new equity” referred to any equity introduced into the business on or after 1 January 2015 and used for producing taxable income but excluded any equity created from the capitalization of reserves existing on 31 December 2014.
– An exception to this exclusion rule was when the capitalization of such “old” reserves created new business assets which did not exist on 31 December 2014.
– As of 1 January 2020, the“new equity” is now 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 capitalization of reserves existing on 31 December 2014 regardless of whether such equity is funding new business assets.
(c) 80% Restriction
– The amending law clarifies that for the purposes of calculating the 80% restriction, the relevant taxable profits are those relating to 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 (i.e. 80% restriction should apply separately to the taxable income arising from each business asset which is financed by new equity).
– If tax losses arise from the use of new equity into the business, no NID should be available in the relevant year.
– The amendments for the 80% restriction will apply retroactively as from 1 January 2015, since the Law effectively adopts the matching concept followed by the Cypriot tax authorities since the introduction of the NID in Cyprus and the issuance of Circular No 2016/10.
Taxpayers should review their 2020 NID calculations in order to assess whether their annual NID amount is impacted by the amendments within the framework of the upcoming 31 July 2020 deadline for the submission of the 2020 provisional tax declaration and the payment of the first temporary tax installment.
As always, M. Target specialists remain at your disposal should you require any further information or clarification regarding this and/or any other tax matters.