Notional Interest Deduction

The Notional Interest Deduction (NID) regime allows Cyprus companies to claim a tax-efficient return on new equity introduced into the business. It is designed to encourage equity financing over debt and improve the competitiveness of Cyprus as a holding, financing, and operating jurisdiction.

NID effectively reduces taxable profits, functioning similarly to interest on loans without any actual borrowing or interest payments.

Who can benefit?

NID is available to Cyprus tax-resident companies and Cyprus permanent establishments of non-resident companies that introduce new equity into the business after 1 January 2015.

Common eligible scenarios include:

Incorporation of a new company with paid-up share capital
Additional share capital injections
Capital contributions in the form of share premiums
Capitalisation of certain debt balances (subject to conditions)

What Qualifies as “New Equity”?

New equity refers to paid-up share capital or share premium introduced after 1 January 2015 and used for business purposes.

Excluded equity includes amounts used for:

Acquisition of assets not used in the business
Private motor vehicles
Assets generating tax-exempt income

NID is not allowed on revaluation reserves, retained earnings, or old equity existing before 2015.

How the NID Is Calculated

NID is calculated using the formula: New Equity × NID Reference Rate

The NID Reference Rate is defined as:
(10-year government bond yield of the country where the assets are used + 5%), but not lower than the Cyprus bond yield + 5%.

Key points:

The reference rate is published annually by the Cyprus Tax Department.
NID cannot exceed 80% of taxable profit arising from the activities financed by the new equity.
The deduction is optional and may be claimed annually depending on tax optimisation needs.

Practical Effects and Benefits

For many businesses, NID creates substantial tax efficiencies, including:

Reduction of the effective corporate tax rate
Incentivising new capital injections
Enhancing group financing structures
Strengthening balance sheets through equity rather than debt

When planned correctly, NID can have similar tax benefits to intra-group financing without transfer pricing concerns or thin capitalisation issues related to excessive debt.

Compliance Requirements

To claim NID, companies should ensure:

Proper documentation supporting the introduction and use of new equity
Accurate tracking of equity per source and per asset/activity financed
Annual review to optimise the NID claim
Compliance with transfer pricing rules where applicable

Typical Use Cases in Practice

Holding companies increasing equity to finance acquisitions
Financing companies replacing debt with equity to minimise transfer pricing exposure
Operating companies injecting new capital for expansions or new projects
Start-ups capitalised with equity instead of shareholder loans