Earlier this month, on 5 June 2020, Cyprus’s House of Representatives passed a bill amending Section 9B of the Income Tax Law. The provision relates to the application of the so-called Notional Interest Deduction (NID) to corporate entities.

NID in Brief

The following corporate entities can claim NID on equity capital introduced into their business on or after 1 January 2015:

  • Cyprus tax-resident companies
  • Foreign companies with permanent establishments in the country

NID is the multiple of the new equity on the one hand and the reference interest rate on the other. The resulting sum is deducted from a company’s taxable income for a given tax year and for the period during which it used the equity to carry out its activities. However, the NID is dependent on a number of conditions, such as a taxable income limitation.

While the regulations concerning NID remain largely the same, the new bill introduced three key changes. These relate to the definitions of reference interest rate and new equity, as well as the so-called 80 percent rule. 

The Old Rules

Reference Interest Rate

Under the old rules, the reference interest rate equaled the 10-year government bond yield of:

  • The country of investment of the new equity (as published annually), or
  • Cyprus (as of 31 December of the previous tax year),

whichever is higher, and increased by 3%.

However, the reference interest rate could not be lower than Cyprus’s 10-year government bond yield as of 31 December of the year preceding the relevant tax year, increased by 3%.

For more details on the latest 10-year government bond yield rates for NID purposes, refer to the EY Global Tax Alert from 13 February 2020.

New Equity

New equity refers to equity introduced into a business on or after 1 January 2015. However, it excludes any equity generated from the capitalization of reserves existing on 31 December 2014 or prior. There is an exception to this rule: it applies to situations where the capitalization of such old reserves gives rise to new assets that did not exist on 31 December 2014.

The 80% Restriction

Under the old provisions, the NID may not exceed 80 percent of the taxable income for the relevant tax year before deducting the NID.

The New Rules

Amended Definition of Reference Interest Rate

According to the new rules, as of 1 January 2020, the 10-year government bond yield will no longer equal the higher of the Cyprus yield rate or that of the country of investment.

Instead, the bond yield will be determined solely based on the jurisdiction of investment. In addition, Cyprus’s yield rate will no longer be used to set the minimum.

Furthermore, the risk premium rises from 3% to 5%.

In the event that the jurisdiction of investment has not issued a government bond on 31 December of the year preceding the relevant tax year, the reference interest rate shall be determined on the basis of the government bond yield of Cyprus, increased by 5%.

Amended Definition of New Equity

Under the amended Section 9B, as of 1 January 2021, corporate entities will no longer be able to claim NID on equity generated through capitalization of reserves that existed on 31 December 2014. This rule applies whether or not such equity has created new business assets after 31 December 2014.

Amended Definition of the 80% Restriction

The new Section 9B introduced the following changes to the 80 percent restriction:

  • The restriction now applies to taxable income arising from the new equity.
  • In the event of tax losses due to the introduction of new equity, companies will not be able to claim NID for the relevant tax year.
  • The restriction applies individually to the taxable income generated by each business asset that has been funded by the new equity.

These amendments implement the so-called matching concept, which has been applied in practice ever since NID was first introduced. The new rules will, therefore, apply retroactively as of 1 January 2015. 

Entry into Force

The new provisions will enter into full effect as soon as they are published in the Official Gazette of Cyprus. The publication is due to take place later this month.

For more information please contact us at info@savvacyprus.com. We will be happy to assist you.


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