On the 18th of July 2016, the Cyprus Tax Department published the Interpretation and tax Practice for the new “Article 9B” of the Income tax Law 116(1)2015 for the Notional Interest Deduction on new equity with effect from 1st January 2015.
Based on the Article 9B, “NID” is a deduction against taxable profit calculated by applying a “reference interest rate” to the new equity injected into companies and used by companies for the performance of its activities under certain conditions and constraints.
This deduction should not exceed 80% of the taxable profit that arises from the introduction of new equity as determined on the basis of the Income tax Law. The right to claim NID applies to Cyprus Tax Resident Companies and Cyprus Permanent Establishments of non- resident companies.
The circular provides the legal basis for the NID, analyses definitions, explains underlying concepts and basic principles. It also provides provisions with practical application and examples provided for better understanding and implementation of the legislation.
New equity is considered to be represented by shares of any class (including ordinary, preference, redeemable and convertible shares) paid in cash or in kind as well as share premium that have been issued and redeemed on or after 1st of January 2015.
Unpaid share capital for which a corresponding requirement has been recognised which is attributable to interest or deemed to be is subject to Income tax law and it is considered to be paid-up capital for the purposes of the circular.
In the case of a Cyprus resident Company with the head offices being outside the Republic of Cyprus, the share capital and the share premium for the purposes of Article 9B will be determined on the basis of their legal characteristics.
The Circular clarifies that the following may qualify as a new equity:
As per the legislation, the NID rate is the 10-year government bond yield, where the funds are invested plus a 3%. There is a minimum rate which is the yield on the 10-year government bonds of the Republic of Cyprus plus 3% and the reference date is the 31st of December of the prior tax year.
The Circular provides anti – avoidance provisions and practical examples dealt with by the circular as of below:
The guidance set out seven worked examples illustrating various hypothetical scenarios for better understanding of the legislation. It is important to note that the example(s) provide a brief guide only and it is essential that appropriate professional advice is obtained.
A simple example will help to illustrate the principles provided by Circular:
The Company “X” issues and receives new equity to €150m which is used to finance the purchase of three assets worth €50m each in three different countries. More details on the table below:
The 80% ceiling of the notional interest deduction calculates separately for each of the assets and as a whole for the total of new equity as follows:
Result: The total maximum NID that can be claimed is the smallest of point (5) and (6) above, therefore €20,2m.
The Cyprus Tax Authorities introduced the Notional Interest Deduction to encourage inward investment, strengthen the economic robustness of Cypriot entities and preserve their competitiveness.
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