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The Cyprus Notional Interest Deduction (NID) is a powerful tax incentive that allows businesses to claim a tax deduction on equity financing, similar to how companies traditionally deduct interest on debt. Introduced on January 1, 2015, this regime fundamentally changes how businesses approach capital structure by making equity financing as tax-attractive as traditional debt financing.
The bottom line: With NID, Cyprus companies can reduce their effective corporate tax rate from 12.5% to as low as 2.5%, which is a compelling reason for businesses to consider Cyprus as their operational base.
Traditional tax systems favor debt over equity because interest payments on loans are tax-deductible, while returns on equity are not. This creates an imbalance that can lead to:
Cyprus introduced the NID regime to:
The NID regime applies to:
Whether you’re running a holding company, a financing vehicle, an intellectual property company, a trading business, or any other commercial enterprise, you can potentially benefit from this regime. This makes NID particularly valuable when combined with other Cyprus tax advantages for comprehensive tax optimization.
The NID calculation follows a straightforward formula:
NID = New Equity × Reference Rate
However, the actual deductible NID is subject to a cap:
Maximum NID = 80% of Taxable Profit (before NID deduction)
This means your NID deduction cannot exceed 80% of the taxable profit generated from activities funded by the new equity.
Because corporate profits in Cyprus are taxed at 12.5%, and NID can shelter up to 80% of taxable income, the effective tax rate can be reduced to:
Effective Tax Rate = 20% × 12.5% = 2.5%
This represents one of the most competitive tax rates in the European Union for operating companies.
“New Equity” refers to share capital and share premium introduced into a company on or after January 1, 2015. This includes:
The reference rate determines the notional interest you can claim and is calculated as:
Reference Rate = 10-Year Government Bond Yield + Premium
1. Government Bond Selection:
2. Premium Addition:
Example 1:
New equity deployed in Germany. Germany’s 10-year bond yield (Dec 31, 2024) = 2.8%
→ Reference Rate = 2.8% + 5% = 7.8%
Example 2:
New equity deployed in Ireland. Ireland’s 10-year bond yield (Dec 31, 2024) = 3.2%
→ Reference Rate = 3.2% + 5% = 8.2%
Example 3:
New equity deployed in Cyprus. Cyprus 10-year bond yield (Dec 31, 2024) = 3.5%
→ Reference Rate = 3.5% + 5% = 8.5%
Scenario:
A Cyprus company introduces €5,000,000 in new equity in 2025. The funds are used to purchase income-generating property in Cyprus. The reference rate is 8.5% (Cyprus bond 3.5% + 5% premium). The property generates annual taxable income of €800,000.
Step 1: Calculate Potential NID
NID = €5,000,000 × 8.5% = €425,000
Step 2: Apply the 80% Cap
Maximum NID = €800,000 × 80% = €640,000
Step 3: Determine Deductible NID
Deductible NID = Lower of €425,000 and €640,000 = €425,000
Step 4: Calculate Tax
The Notional Interest Deduction (NID) is a Cyprus corporate tax incentive that allows companies to deduct a notional interest expense on new equity. It promotes equity financing over debt by offering a tax benefit equivalent to interest on capital invested. The reference rate is based on the yield of long-term government bonds plus a 5% premium. The deduction is capped at 80% of chargeable income.
| Factor | Traditional Debt | NID Equity Financing |
|---|---|---|
| Tax Deductibility | Interest is deductible | Notional interest is deductible |
| Effective Tax Rate | 12.5% (15% from 2025) | 2.5% to 3% (depending on year) |
| Financial Risk | Requires debt repayment; insolvency risk | No repayment obligation; more stable |
| Cash Flow Impact | Actual interest payments required | No actual cash outflow for NID |
| Balance Sheet | Increases liabilities | Strengthens equity base |
| Flexibility | Restrictive covenants common | Greater operational flexibility |
| Regulatory Compliance | Thin capitalization rules apply | No thin cap concerns |
| Credit Rating Impact | Can weaken credit profile | Strengthens financial position |
Use Cyprus companies with strong equity bases to provide funding to group companies, enjoying near-tax-free interest income while borrowers get interest deductions in their jurisdictions. Our business advisory team can help structure these arrangements optimally.
While dividend income is typically exempt under Cyprus’s favorable holding company regime, NID can benefit holding companies earning other taxable income from management fees, IP royalties, or other services.
Companies holding and licensing IP can fund acquisitions with new equity and significantly reduce tax on royalty income. When combined with the Cyprus IP Box Regime, businesses can achieve effective tax rates as low as 2.5% on both qualifying IP income and other taxable profits.
Property investment companies can use NID to reduce tax on rental income, capital gains, and trading profits.
The Cyprus Notional Interest Deduction regime offers legitimate, EU-approved tax optimization that can dramatically improve your company’s after-tax returns. Whether you’re establishing a new Cyprus presence or restructuring existing operations, NID should be a key consideration in your tax planning strategy.
With over 30 years of experience serving local and international clients, DPCA combines deep technical knowledge with practical implementation expertise. We’ll help you navigate the complexities of NID, ensure full compliance, and maximize your tax savings while leveraging other Cyprus tax advantages like the IP Box Regime and double tax treaty benefits.
Yes. NID applies only to the portion of your business funded by new equity. You can still deduct actual interest on debt while claiming NID on equity-funded activities. Our tax planning experts can help optimize your debt-to-equity ratio for maximum tax efficiency.
You calculate NID separately for each investment based on that country’s government bond rate plus the 5% premium. Total NID is the sum of all calculations, subject to the 80% cap on overall taxable profits.
If a foreign company operates in Cyprus through a permanent establishment (PE), the PE can claim NID on new equity attributable to its Cyprus operations.
The unused NID is lost and cannot be carried forward. This makes tax planning crucial to ensure you have sufficient taxable income to utilize the deduction. Consider combining NID with IP Box benefits to maximize overall tax efficiency.
No. NID is “notional,” meaning no actual payment occurs. It’s purely a tax calculation that reduces your taxable profit.
Ensure any related-party transactions involving new equity funds comply with arm’s length principles. Transfer pricing documentation supports both your commercial substance and NID claims. Our business advisory team can help ensure compliance.
No. Share buybacks reduce equity and would typically reduce your NID benefit. If you previously claimed NID and then reduce equity, adjustments may apply.
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