Cyprus Notional Interest Deduction (NID): A Powerful Corporate Tax Incentive

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Angelos G. Paphitis Angelos G. Paphitis Managing Partner
Michael Alexandrou Michael Alexandrou Partner | Tax

Cyprus has earned its reputation as one of Europe’s most business-friendly jurisdictions, thanks in part to its innovative tax incentives designed to attract international companies, investment groups, and high-value projects. Among these tools, the Notional Interest Deduction (“NID”) stands out as a unique mechanism that allows companies to reduce their taxable profits by applying a deemed interest deduction on new equity, effectively putting equity financing on par with debt financing for tax purposes.

In this article we aim at exploring the legal background, tax treatment, calculation methods, benefits, and strategic opportunities of NID in Cyprus, providing a practical guide out of our experience for companies and investors. We also explain how AGPLAW’s specialized tax, corporate, banking, and immigration teams can help businesses unlock the full potential of this incentive.

Legal Background

The Cyprus NID regime was introduced in 2015 under Article 9B of the Income Tax Law (N118(I)/2002), as part of the government’s efforts to enhance the country’s competitiveness and attract foreign direct investments. The core idea is simple: companies that increase their capital base with new equity (whether through cash or in-kind contributions) are rewarded with a tax deduction similar to what they would get if they had financed their business through loans and paid interest.

The core idea is simple: companies that increase their capital base with new equity (whether through cash or in-kind contributions) are rewarded with a tax deduction similar to what they would get if they had financed their business through loans and paid interest.

Historically, corporate tax systems have been biased toward debt financing because interest on debt is tax-deductible, while returns on equity (such as dividends) are not. Cyprus, through NID, corrects this imbalance by allowing companies to deduct a notional interest expense on their qualifying equity, making it an innovative, EU-compatible measure.

What Qualifies as “New Equity”?

To benefit from NID, companies must have new equity that meets the following criteria:

  • Introduced into the company on or after 1 January 2015.
  • Consisting of fully paid-up share capital or share premium.
  • Originating from real cash or in-kind assets (such as property or intellectual property).
  • Used for the production of taxable income (i.e., not idle or non-business use).

Importantly, retained earnings or reserves converted to capital do not qualify. This ensures that only genuinely fresh capital injections are rewarded.

How Is NID Calculated?

The annual NID is calculated as:

New Equity × Reference Interest Rate

Where:

  • The Reference Interest Rate is the 10-year government bond yield of the country where the new equity is invested or used, plus 5% (with a minimum floor set by the Cyprus 10-year bond yield + 5%).

Example: If the Cyprus 10-year bond yield is 3%, the minimum reference rate is 3% + 5% = 8%.

Therefore, €1 million of new equity would generate a notional deduction of: €1,000,000 x 8% = €80,000. At the Cyprus corporate tax rate of 12.5%, this translates to tax savings of: €80,000 x 12.5% = €10,000

Limitations:

  • The NID cannot exceed 80% of the taxable profit before applying the deduction.
  • The deduction must be proportionate if the new equity is only partly used for taxable income generation.
Strategic Benefits

The NID offers several advantages:

  1. Tax Optimization: Companies can lower their effective tax rate significantly, bringing it below the nominal 12.5%, depending on the size of the deduction.
  2. Equity Financing Becomes Attractive: With NID, equity financing gains a tax benefit traditionally reserved for debt financing, improving balance sheet strength and lowering leverage.
  3. Enhanced Group Structures: International groups using Cyprus holding, financing, or IP companies can enhance tax efficiency by injecting equity instead of debt.
  4. Compatibility with Other Tax Incentives: NID can be combined with the Cyprus IP Box regime, group relief, or foreign tax credits for further optimization.
  5. EU and OECD-Aligned: The NID regime fully complies with EU state aid rules and OECD Base Erosion and Profit Shifting (BEPS) standards, providing legal certainty to international investors.
Steps to Achieve It

To successfully implement NID, companies should:

  1. Identify qualifying new equity contributions.
  2. Ensure proper legal documentation (shareholder resolutions, share capital increases, share premium records).
  3. Confirm the actual use of funds in income-generating activities.
  4. Calculate the applicable reference interest rate based on the relevant government bond yields.
  5. Apply the deduction in the annual tax return and maintain full compliance with reporting obligations.
AGPLAW’s Expertise

At AGPLAW, we provide end-to-end services to help businesses and investors benefit from Cyprus’ NID regime. Our tax, corporate, banking, and immigration teams offer:

  • Tailored structuring advice for capital injections.
  • Preparation and filing of legal and tax documentation.
  • Assistance with BCS (Business Facilitation Unit) registration where applicable.
  • Cross-border tax planning and group structuring.
  • Ongoing tax compliance and advisory services.
Frequently Asked Questions (FAQ)

Q1: Can retained earnings or reserves qualify as new equity?
No. Only fresh contributions of funds or assets qualify as “new equity” under Article 9B.
Q2: Can the notional deduction create tax losses?
No. The NID can only reduce taxable profits up to 80%; it cannot create or increase a tax loss.
Q3: Is NID applicable for non-tax-resident companies?
No. Only Cyprus tax-resident companies and Cyprus permanent establishments of non-resident companies can claim NID.
Q4: How is the reference interest rate determined?
It is based on the 10-year government bond yield of the country where the new equity is used, increased by 5%. If the bond yield is negative, it is set at zero.
Q5: Can NID be combined with the Cyprus IP Box?
Yes. Combining the NID with other incentives, such as the IP Box regime, can lead to very efficient tax planning.
Q6: What kind of documentation is required?
Proper share capital documentation, evidence of payment, and detailed records of fund use are essential to support the deduction.

Final Thoughts

The Notional Interest Deduction is one of Cyprus’ most valuable corporate tax incentives, providing companies with a powerful tool to reduce their taxable profits and enhance financing flexibility. Whether you are a multinational group, investment holding company, or local business, carefully structuring your equity financing can lead to substantial tax savings. AGPLAW’s dedicated teams are ready to assist with every step, from structuring and legal implementation to tax calculations and compliance.

The information provided by AGPLAW | A.G. Paphitis & Co. LLC is for general informational purposes only and should not be construed as professional or formal legal advice. While every effort has been made to ensure the accuracy and reliability of the information contained herein, the author, publisher, or any related parties make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information. In no event will the author, publisher, or any related parties be liable for any loss or damage, including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in connection with, the use of this document/article. You should not act or refrain from acting based on any information provided above without obtaining legal or other professional advice.