CONTENTS OF LAST ISSUE
Cyprus Introduces Notional Interest Deduction Regime
Introduction of a Notional Interest Deduction Regime on Equity
Over the last years, the supply of credit by financial institutions has been considerably reduced due to the banking crisis. In an effort to help the economy return to a growth path, the Government has introduced a Notional Interest Deduction (NID) regime on corporate equity. The NID regime is expected to encourage the introduction of equity capital into corporate structures which will effectively result in de-leveraging the economy and foster economic growth. The NID will remove any distortions between equity and debt finance by bringing equity and debt into a level playing field since both will be entitled to a tax deduction.
As per the amended law, corporate entities (including permanent establishments of foreign companies) will be entitled to a NID on equity. The NID will equal the multiple of “reference interest rate” and the “new equity” held and used by a company in the carrying on of its business activities. Both terms are defined in the law:
- “Reference interest rate” means the interest rate of the 10 year government bond yield of the country in which the new equity is invested increased by 3% having as a lower limit the 10 year government bond yield of the Republic of Cyprus increased by 3%. The bond yield is the one applicable as of 31 December of the tax year preceding the relevant tax year.
- “New equity” means any equity introduced in the business on or after 1 January 2015 in the form of issued share capital and share premium (provided it is fully paid) and “old equity” means equity that existed on 31 December 2014. “New equity” does not include amounts that have been capitalized as equity and which are the result of a revaluation of movable or immovable property.
The NID regime is considered as interest expense and is subject to the same limitation rules as interest. It needs to be mentioned that the NID granted on new equity cannot exceed 80% of the taxable profit before allowing the NID. In the event of losses, the NID will not be available. Effectively, this means that the NID cannot create or increase a tax loss. Taxpayers can elect not to claim the NID or claim part of it for each tax year.
The law includes both specific and general anti-abuse provisions aiming to:
- Limit the classification of capital as “new equity” in case this relates directly or indirectly to reserves that existed on 31 December 2014 and in case the contributed capital is not related to new assets used in the business;
- Tackle arrangements which aim to re-characterize “old equity” into “new equity” or arrangements which have been put into place with the aim of claiming NID without any valid economic or commercial reasons;
- Restrict the NID in case another entity has claimed a NID or an interest expense deduction on the same equity capital;
- Ensure that the NID is calculated as if no company reorganization had taken place.
The NID regime is effective as of 1 January 2015.
Other Articles on Topics
