In continuance to our recent article in regards to tax saving incentives for individuals; we would like to present to you some of the most important changes enacted over the last few years as far as companies are concerned.
During the past few years Cyprus has put into force tax incentives that would provide companies and their shareholders, benefits from investing into Cyprus companies.
The most recent and important changes are identified and explained below in more detail.
Notional interest deduction – NID
Based on the new tax law effective as from January 1st 2015, a Cyprus tax resident company and Cyprus permanent establishments are entitled to a Notional interest Deduction – NID, on the introduction of new capital in the company used for the production of taxable income.
As per the above law new equity includes the following:
- New equity introduces in the company as from January 1st 2015, in the form of paid up share capital and share premium.
- Loans payable converted into issued share capital.
- Shareholders credit balances converted into issued share capital.
- Non- refundable capital contribution converted into issued share capital.
- Old equity that will be used to finance new business activities.
The NID is calculated by multiplying the new equity by the 10- year government bond (as at 31 December of the prior tax year) of the country where the funds are employed, plus a 3% premium, subject to a minimum rate, equal to the yield of the 10-year Cyprus government bond plus a 3% premium.
The NID is restricted to 80% of the taxable profit generated by the new equity.
This incentive can be taken in addition with other tax incentives offered but always with taking into consideration the anti -abuse provisions.
In addition with the above notional expense offered in the case of new equity, notional interest expense is also offered to a Cyprus company when the provisions of Article 33 (Arm’s length Principles) are applied to another Cyprus company.
As from January 1st, 2015, in the case where the Tax Commissioner increases the profits of a Cyprus Company trading with another Cyprus Company for not following the Arm’s length principals of (Article 33) then the 2nd Cyprus Company may reduce its taxable profits with an amount equal to the increase suffered by the 1st Cyprus Company (notional expense).
The notional expense can be applied provided the company has activities that generate taxable income.
The above incentives are due to increase the capital injected into companies for usage in taxable activities and increase the cash flow into the country. Especially the NID can have similar benefits to debt financing and companies can maintain tax benefits while increasing their financial strength.