1. Introduction
On the 16th of July, 2015 the income tax legislation has been amended to introduce a Notional Interest Deduction (NID) on new capital used in the business. Under the new extremely positive law it is now possible for a company to claim a NID on the new capital introduced into the company.
2. Date of commencement
The above change enters into force from the 1st January, 2015.
3. Eligible persons
The NID, which is effectively a tax allowable deduction against the taxable profits of the company, applies to Cyprus tax resident companies and to Cyprus permanent establishments of foreign companies that carry out a business activity.
A company may in any given tax year elect to claim whole or part of the amount of the NID available.
4. Calculation of the NID
Is defined as the higher of:
• The 10 year government bond yield of the state in which the new equity is invested, increased by 3%, or
• The 10 year Cyprus government bond yield, increased by 3%.
The rate used will be the rate as at 31 December of the previous tax year, i.e. for the 2015 tax statements the 31 December 2014 rate will be used.
On the 31st of December, 2015 the Cyprus Tax Department issued a notification relating to the interest reference rate of the 10-year government bond as at 31 December 2014, for the purpose of applying NID for the tax year 2015.
Based on the Tax Department’s notification, the minimum reference interest rate to be used for NID purposes for the tax year 2015 should be 8,037% being 5,037% yield on the 10-year Cypriot government bond plus 3%.
4.2 New Capital
Is the equity introduced in the business on or after 1 January 2015 in the form of issued share capital and share premium (provided that these are fully paid in cash or in kind).
The New Capital does not include the following:
• Amounts that have been capitalized and which were derived from revaluation of movable or immovable property;
• Capital, derived directly or indirectly from reserves that existed as at 31 December 2014 but does not relate to the financing of new assets used in the business.
4.3 The New Capital Is Contributed In Kind
In the case where the new capital is contributed in the form of assets in kind, the value of the capital for the purposes of the NID cannot exceed the market value of those assets on the date of their introduction in the business, and no notional deduction will be provided if such value cannot be justifiably documented.
5. Limitations:
a) The NID cannot exceed 80% of the taxable income arising before the deduction;
b) No NID is available in the case of a taxable loss;
c) The deduction is afforded in the tax year in which the new capital is used in the business. The NID is deemed to be interest by nature and as such may itself be restricted in the usual way. For example, interest on a loan used to purchase assets not used in the business is restricted. Where new capital is used for this purpose, the NID will also be restricted;
d) In the case where the new capital of a Cyprus tax resident company or a non-Cyprus tax resident Company which maintains a permanent establishment in Cyprus, is derived directly/indirectly from the new equity of another Cyprus tax resident company or a non-Cyprus tax resident company which maintains a permanent establishment in Cyprus, then only one of these companies can claim the NID on this new capital;
e) In the case where the new capital is provided directly/indirectly from loans on which interest expense deduction is claimed, the NID on the new capital is reduced by the amount of the interest expense deduction claimed;
f) Where an approved reorganization scheme is used, which does not result in taxable profit, the NID is calculated as if the reorganization scheme never took place;
g) The Commissioner may NID where he judges that:
• Transactions have taken place without substantial economic or commercial purpose merely for the purpose of obtaining the deduction;
• The transactions were such whereby old capital was presented as new capital.
