Cyprus: Changes in the Rules of Notional Interest Deduction

On June 16, 2020 the Cyprus Government Gazette published amendments to the Cyprus Income Tax Law (ITL) (Law 66 (I)/2020) concerning the rules for deducting conditional interest (notional interest deduction – NID).

Starting from 2015, Cyprus companies, as well as permanent representative offices of foreign companies in Cyprus, can use the deduction of conditional interest deduction (notional interest deduction) when calculating income tax. This deduction is equal to the product of new investments in the authorized (additional) capital of the company and the conditional interest rate. New investments in capital means authorized or additional capital paid after January 1, 2015 (both in monetary and non-monetary form). The notional interest rate is the interest rate on a 10-year government bond of a country in which new investments were eventually involved, increased by a statutory surcharge. Before the changes were made (until 2020), the surcharge was 3%.

At the same time, the minimum deduction amount is calculated based on the income rate on the 10-year government bond of Cyprus, increased by a surcharge. This deduction is not allowed if it exceeds 80% of the company's taxable profit. Therefore, this deduction can’t generate a loss.

So, what has changed?

1. Starting from January 1, 2020, the income premium on the country's ten-year government bond will increase from 3% to 5%, with no minimum base rate.
2. If the country where the funds are used has not issued any government bonds before December 31 of the previous tax year, the "base rate" is determined based on the yield of a ten-year Cyprus government bond (as at December 31 of the previous tax year) plus 5%.
3. Starting from January 1, 2021, in order to apply the deduction, a Cyprus company must be invested with "new capital", i.e. funds that were not at its disposal before January 1, 2015 must be invested.