Cyprus Notional Interest Deduction (NID) 2026 — Equity-Funding Tax Relief, Calculation, Limits

1. The legal framework

Cyprus introduced Notional Interest Deduction (Article 9B ITL 118(I)/2002) effective 1 January 2015 — one of the first EU implementations of an equity-funding incentive (Belgium had a similar prior regime, since reformed). NID applies to NEW EQUITY introduced from 1 January 2015 onwards (i.e., equity capital + share premium + retained earnings reinvested).

2. The NID rate

• Base rate: yield on 10-year Cyprus government bonds (currently ~3-4%, varies with bond market).
• Plus 5 percentage points risk premium.
• = NID rate typically ~8-9% in current bond-yield environment.
• Rate updated annually based on prevailing yields.
• Cyprus Tax Department publishes the applicable rate per year.

3. Calculation mechanics

NID computation steps:

1. 1Identify NEW EQUITY introduced from 1 January 2015 onwards (paid-up capital + share premium + retained earnings reinvested in business).
2. 2Exclude PRE-2015 equity (locked out of NID).
3. 3Apply NID rate to the new-equity base.
4. 4Cap the deduction at 80% of the taxable profit ATTRIBUTABLE to the activity in which the new equity is invested.
5. 5Deduct from corporate taxable profit.

4. Worked example

HypoCo Ltd has €5,000,000 of post-2015 new equity. NID rate for 2026: 8.5% (~3.5% bond yield + 5% premium).

• Notional interest: €5,000,000 × 8.5% = €425,000.
• Taxable profit attributable to new-equity activity: €600,000.
• 80% of attributable profit: €480,000.
• NID applied: lower of (notional interest €425,000) or (80% cap €480,000) = €425,000.
• Tax saved: €425,000 × 15% CIT = €63,750.

5. The 80% cap interaction with IP Box

NID is applied BEFORE IP Box. For an IP-heavy SaaS using both regimes:

1. 1Compute taxable profit.
2. 2Apply NID (against attributable activity profit, capped at 80%).
3. 3Apply IP Box 80% exemption on qualifying IP-derived profit (remaining after NID).
4. 4Compute tax on residual at 15% CIT.

6. Anti-abuse provisions

• NID denied where equity is funded by debt to a related party in a tax-favourable jurisdiction (anti-double-dipping).
• NID denied where equity transactions lack 'sufficient business purpose'.
• Notional interest on equity that funds passive investments may face additional scrutiny.
• Documentation required: source-of-funds for new equity, business purpose, attribution to activities.

Frequently Asked Questions

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Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or financial advice. Tax laws change frequently. Consult a qualified Cyprus adviser for guidance specific to your situation. The information on this page is general guidance only and does not constitute legal, tax, accounting, immigration or financial advice. Specific advice should be obtained based on the facts of each case.