|
|
|
|
ON JANUARY 1, 2015, THE CYPRUS PARLIAMENT PASSED INTO LAW (ARTICLE 9B OF THE INCOME TAX LAW N.118(I)/2002) THE “NOTIONAL INTEREST DEDUCTION (NID)” EFFECTIVE FROM THIS DATE.
The NID provides a significant tax incentive for existing companies to re-capitalise their operations. Furthermore, it aims to attract new companies to set up their operations in Cyprus and benefit from this tax incentive.
Companies (including permanent establishments of foreign companies) will be entitled to a NID on equity.
Companies that attract or introduce new equity/capital would be able to claim a NID of up to 80% of their taxable profit before its deduction, reducing their overall effective tax rate to as low as 2.5%. No notional interest deduction will be available if the tax computation results in tax losses.
The NID would be calculated as follows: NID = qualifying equity x reference interest rate.
Qualifying equity will include share capital (ordinary, preference, redeemable or convertible) of whatever class and share premium issued (provided it is fully paid) on or after 1st January 2015.
Share capital issued but not paid and for which no respective liability has been recognized, which is deem to account or provide interest that is under the income tax law represents capital that has been repaid.
New equity includes:
-
Issue of share capital arose from the capitalization of realized reserves created after 1.1.2015
-
Issue of share capital arose from the capitalization of realized reserves that existed on 31.12.2014 in case that can be proved that they are related with the purchase of new fixed assets that generate taxable income.
-
Issue of share capital arose from the conversion of borrowings or other borrowing products (bonds, debentures, currency exchanges etc) or and of shareholders credit balances.
-
Issue of share capital from the conversion of non-reciprocal capital contribution).
New equity does not include amounts that have been capitalised as equity and which are the result of a revaluation of movable or immovable property. New equity may be introduced in cash or in assets in kind.
Reference interest rate means the minimum rate of notional interest deduction and is the yield on the 10 year Cyprus Government Bonds plus a 3% premium.
The Tax Department has announced that the ten-year government bond yield rates of the countries below as at 31/12/2015, which represents their “reference rate” for the purposes of granting tax allowance on new capital as per article 9B of the Income Tax Law N.118(I)/2002, as amended, is as follows:
Cyprus 3,685%
Czech Republic 0,499%
Germany 0,568%
India 7,758%
Latvia 1,104%
Poland 2,937%
Romania 3,703%
Russia 9,570%
Ukraine 9,622%
United Arab Emirates 7.490%
The interest reference rate of the ten year government bond as at 31/12/2014, for the purposes of the article 9B of the Income Tax Law N118(I)/2002 as amended, is as follows for the countries below:
Cyprus 5,037%
India 7,86%
Russia 13,73%
Rumania 3,57%
Germany 0,54%
The notional interest would be deductible according to the same rules as actual interest expense, i.e. the degree of tax deductibility would depend on the way the new equity/capital will be utilised. In the event of losses, the NID will not be available. Consequently, 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 year.
The NID is provided only for the period within the tax year that the new capital (issued and repaid) was belonging to the company and cease to apply within their withdrawal through reduction in share capital.
The law includes a number of anti-abuse provisions in order to avoid possible abuse of the NID as follows:
-
To avoid double counting of the notional interest deduction, if the new equity of a Cyprus company derives directly or indirectly from new equity of another Cyprus company then the notional interest deduction is available for only one of the two companies.
-
If the new equity of a Cyprus company derives directly or indirectly from funds on which another company has claimed interest expense deduction in Cyprus then the notional interest deduction is reduced by the amount of the interest expense claimed.
-
In the case where new equity is introduced in the form of assets in kind then the amount of the equity may not exceed the market value of these assets.
-
New equity which derives from reserves that existed on 31 December 2014 are excluded if they do not relate to the financing of new assets used in the business.
-
New equity which derives from share capital and/or share premium that existed on 31 December 2014 is excluded.
-
New equity which derives from asset revaluations is excluded.
-
In the case of companies undergoing a reorganisation under the provisions of the income tax law, the notional interest deduction will be based on their new equity calculated as if the reorganization had not taken place.
|
|