Cyprus Notional Interest Deduction (NID): Deducting a Return on Equity

What Is the Cyprus Notional Interest Deduction?

The Notional Interest Deduction (NID) is a tax incentive introduced in Cyprus in 2015 to address the debt-equity bias in tax systems. Traditional tax systems allow interest on debt to be deducted (reducing taxable income) but do not allow any deduction for the cost of equity capital. The NID equalises this treatment by allowing a deduction for a deemed (notional) interest charge on new equity introduced into the company.

In practical terms: a company that is funded by equity rather than debt can still claim a deduction equivalent to what the interest cost would have been — reducing its taxable income and therefore its CIT liability.

Calculating the NID

The NID is calculated as:

NID = New Qualifying Equity × Reference Interest Rate

The reference interest rate is the yield on 10-year Cyprus government bonds as at 31 December of the immediately preceding year, plus 5 percentage points. This rate is published annually by the Cyprus Tax Department.

The actual reference rate is published each year by the Cyprus Tax Department. The 3.5% bond yield above is illustrative only.

The 80% Cap

The NID claimed in any tax year cannot exceed 80% of the company's taxable profit before the NID deduction. This means the NID cannot create or increase a tax loss — it can only reduce taxable income to a minimum of 20% of pre-NID taxable profit.

Where the NID exceeds the 80% cap in a given year, the excess is not carried forward — it is lost. Efficient NID planning therefore focuses on timing equity injections to align with profitable years.

What Qualifies as New Equity?

NID applies to 'new equity' — equity introduced into the company on or after 1 January 2015 (the date of the NID's introduction). The following qualify:

• Paid-up share capital on new share issuances (cash and/or in-kind contributions)
• Share premium accounts arising on new issuances
• Retained earnings capitalised by a bonus issue (if the earnings were accumulated post-2015)

Pre-existing equity (share capital and reserves as at 31 December 2014) does not qualify. Debt converted to equity qualifies to the extent genuine cash was originally advanced. The Tax Department actively scrutinises circular equity injection structures.

NID and the IP Box: Can They Be Combined?

The NID and the IP Box are both available simultaneously, but they operate on different bases — the NID reduces the taxable income from all sources based on the equity funding, while the IP Box reduces the tax rate on specific IP income. In principle, both deductions can be claimed in the same return, subject to the 80% NID cap applying to pre-NID, pre-IP Box income.