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Cyprus – Tax –Notional Interest Deduction (the “NID”) and Circular 2016/10

 

The NID rules have been introduced into our legal system in 2015 and provided that the corporate entities, including the PEs of foreign companies, shall be entitled to NID on their equity.

On 1st August 2016, the Tax Department has issued a circular providing much needed extensive clarifications.

The purpose of the article is to explore those clarifications. However, firstly it is best if we outline how NID works.

 

NID at work.

The NID calculated as follows: New Equity × NID rate but it cannot exceed 80% of taxable income.

The purpose of the introduction of NID was to strengthen the equity base for the business, the business that are funded by equity can claim a deduction of the notional expense computed as a percentage of any equity introduced after 2015.

The circular gives explanations and provided numerical examples of the application of NID.

 

New Equity?

It clarifies what New Equity means. New Equity is the equity introduced after 1 January 2015 in the form of the paid up share capital and share premium and it is available as long as the new equity is in issue. The New Equity includes shares paid in cash or in kind of any class.

 

NID reference Interest Rate?

Pursuant to the legislation, the NID Interest rate is the yield on 10 – year government bonds of the country where the funds are invested plus 3% premium, subject to a minimum amount, which is the yield rate of the 10-year Cyprus government bond applicable on the 31 December of the year preceding  the tax year for which NID is claimed, plus a 3% premium.

The Tax Department will be publishing an announcement of the reference rate of selected states at the beginning of each tax year on its website.

There is a procedure prescribed for the determination of the reference rate, which is not included on the published list.

 

 

NID is capped at 80%

The overall NID is capped at 80% taxable profit derived from all assets/activities that are financed by new equity (also taking into account any tax losses).

 

Anti-avoidance provisions

 

Circular clarified and gives examples on number of anti-avoidance provisions stipulated in the relevant tax legislation.

It should be noted that each case will be examined on its own facts and no NID will be granted if pursuant to the view of the Commissioner of Taxation if there is no commercial substance or purpose and rather the purpose is to erode the tax base.

 

The content of this article is intended to provide a general guide to the subject matter. Specialist advise should be sought about your specific circumstances.

 

 

For further information on this topic please contact

Mrs. Liza Bokova (lbokova@pittaslegal.com) at SOTERIS PITTAS & CO LLC,

by telephone (+357 25 028460) or by fax (+357 25 028461)

 

The content of this article is intended to provide a general guide to the subject matter. Specialist advise should be sought about your specific circumstances.