Notional Interest Deduction
Case: LOAN RESTRUCTURING OPPORTUNITY THROUGH NID
Country: UKRAINE COMPANY “LOAN RESTRUCTURING OPPORTUNITY THROUGH NID
Cyprus resident Companies are entitled to a Notional Interest Deduction (NID) of up to 80% of their taxable income on qualifying new equity. Qualifying new equity includes share capital of any class and share premium issued and settled after 1 January 2015 paid either in cash or in kind.
The above provision, apart from reducing the effective tax of the Cyprus Company by up to 80% thereby decreasing the effective tax rate to as low as 2.5% can also allow for the Cyprus Company to be the beneficial owner of income. Especially in the cases where loans are granted by the Cyprus Company the resulting tax charge can be as low or even lower than in the case of using thin spreads (back-to-back arrangement).
For example, instead of engaging the Cyprus Company through back-to-back loan arrangement, one can take advantage of the NID provisions and grant out a loan through own funds that were introduced in the share capital of the Cyprus Company.
Senario: A Cyprus resident trading/financing Company issues new capital comprising of 1000 shares, with a nominal value of €1 each at a premium of €999 per share (total new equity €1.000.000). The funds are utilized in the business and generate income of i.e. €200.000. Reference Rate for year 2016 as published by the Cyprus Tax Department for funds employed in i.e. Ukraine at 9.622% (NID rate).
Tax Computation:
Income from application of new equity – €200.000
Less: Cost of Sales – €100.000
Less: Administration expenses – €30.000
Profit before claiming NID: €70.000
Less: NID
Lower off;
- Refore restriction: €96.220 (9.622% @ €1m)
- Restricted 80%: €56.000 (80% @ €70k)
Taxable profits – €14.000
@ 12.5% – €1.750
Effective Tax = 2.5% (€1.750/€70.000)
Why Cyprus
Low Tax Regime – Cyprus has a very competitive tax system that is fully aligned with EU and International regulations and Directives.
Excellent Geographical Position – Acting as a gateway to Europe, Middle East, Africa and Asia
Network of various Double Tax Treaties – Cyprus attributes its worldwide recognition to its current large network of double tax treaties with a total of over 58 countries.