The Cyprus Tax Authorities have recently issued a circular in relation to the notional interest deduction (NID) as this was introduced into the Cyprus tax regime at the beginning of 2015.
As of early 2015 (1 January 2015) a notional tax deduction is allowed following the application of the NID to the amount of new equity injected to Cyprus tax resident companies and used for business purposes and for the purpose of business assets financing.
The NID is deductible in a similar manner as for actual interest expense (i.e. only if it is used to finance most types of business assets). NID is deducted following the determination of a company’s taxable profit.
The objective of the NID is to reduce corporate debt by increasing the attractiveness of equity creating a tax lowering effect. The introduction of the NID makes the Cyprus tax system even more attractive as the effective tax rate can be reduced from 12,5% to as low as 2,5%.
The respective circular as issued by the Tax Office clarifies that no NID will be allowed if in the opinion of the tax authorities the main purpose of the underlying transactions was to reduce the liability to tax and there was no substantial economic or commercial purpose.
By definition new equity for the purposes of the NID means equity contributed as from 1 January 2015 in the form of paid-up share capital or share premium. In order for the NID to apply, the subscription price paid must be completed for the issue of shares and can be either in cash or in kind. If consideration is in kind, it cannot exceed the market value of the assets contributed. (A transfer Pricing study may also need to be submitted confirming the value of the assets contributed).
It should be noted that NID granted on new equity cannot exceed 80% of the taxable profit of the company emanating from the assets which were financed by the new equity for the year preceding the deduction. If the company has made a tax loss, then the NID will not be available.
The material contained in this update is for information purposes only. In case you require any further information regarding this matter please feel free to contact Ioanna Solomou.
