Cyprus Adds To Guidance On Calculation Of NIDs

by Lorys Charalambous, Tax-News.com, Cyprus

29 September 2020

The Cyprus Tax Department has released ten-year government bond yield rates for five new territories, to support businesses in calculating claims for Cyprus's Notional Interest Deduction. The rates are for Bermuda, Denmark, Jordan, Portugal, and Switzerland.

Background

The NID concession was introduced in 2015 to provide tax relief for businesses using equity, rather than debt, to finance their investments.

The NID deduction is available to Cyprus tax-resident companies and permanent establishments of non-Cyprus tax resident companies which carry on business.

The NID is an annual deduction which is calculated as: the Reference Interest Rate (RIR) multiplied by New Capital (NC) that belongs to the company that is used for carrying on the company's activities. The deduction is capped at 80 percent of a company's taxable income, potentially enabling companies to reduce the corporate tax rate they face in Cyprus from 12.5 percent to 2.5 percent.

The RIR is fixed for each tax year and is the 10-year government bond rate of return (on December 31 of the immediately prior tax year) of the State in which the NC is invested by the business plus a three percent premium. From January 1, 2020, this three percent premium was increased to a five percent premium.

As a minimum, the lowest rate that the RIR may be is the Cyprus 10-year Government bond rate of return plus the applicable premium.

The RIR is based on the yield on bonds in the official currency of the relevant state of investment. Where the asset is denominated in a currency other than the official currency of the relevant State of investment (e.g. an investment is made in an asset located in State A denominated in the currency of State B) and the relevant State of investment has issued bonds in that other currency (e.g. State A has issued Government bonds denominated in B-currency) then the RIR will be based on the yield on bonds in that other currency.

Tax agency announcement

To support businesses to calculate the quantum of the NID, the Government has now released 10-year bond rates for Bermuda, Denmark, Jordan, Portugal, and Switzerland. For Estonia, it said there was no available government bond as at December 31, 2019.

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