Cyprus Introduces Notional Interest Deduction Regime on ‘New Equity’
On 9th July 2015, the Cyprus House of Representatives voted in favour of the introduction of a Notional Interest Deduction regime, aimed at encouraging investment into corporate structures, and thus reducing excessive debt financing.
Such changes, aimed to further improve Cyprus’ growth prospects, will align the Republic’s system with that of a number of other EU jurisdictions which have successfully introduced similar legislation.
According to the new law, corporate entities (including permanent establishments of foreign companies in Cyprus) will be entitled to a Notional Interest Deduction (NID) on new equity which has been introduced to a business on or after 1 January 2015; with the NID being a multiple of a ‘reference interest rate’1 and such ‘new equity’.
Notably, NID granted on new equity cannot exceed 80% of the taxable profit before allowing the NID, and is not available in the event of losses.
In essence, the NID regime will greatly reduce the effective tax rate where such new equity, within certain parameters and whilst observing specific anti avoidance provisions, has been utilised in carrying out an entity’s business, such a group finance operations.
Advantages of Cyprus as a prime location for group financing include:
1 One of the lowest tax rates in the EU – 12.5%
2. Over 40 double taxation conventions based on the OCED Model.
3. EU membership and subsequent access to EU Directives and EU Treaty freedoms.
4. No thin capitalisation rules
5. No withholding taxes on dividend, royalty or interest payments from the Republic
(1) Calculated on the effective interest earned on the current 10-year bond yield of the country in which the new equity is invested (+3%), with the minimum rate being that of Cyprus (+3%)
