Cyprus Companies, Cyprus financing companies, Cyprus Notional Interest Deduction (NID) on new equity, Cyprus taxation advantages and illustrative examples

The introduction of notional interest deduction further strengthens the setting up of Cyprus companies and especially the setting up of financing activities in Cyprus.

Cyprus Companies are often used to finance other associated foreign companies. This is achieved by setting up a Company in Cyprus in order to finance other associated companies.

According to Cyprus taxation laws, Cyprus companies that are originally financed by own funds / equity are given notional Interest deduction (NID). This means a reduction of the overall effective tax rate of a Cyprus Company depending on the level of Cyprus Company capitalization. The notional Interest deduction (NID) is granted annually for as long as capital is used in the Company.

The Cyprus taxation law on Cyprus Notional Interest Deduction (NID)

Equity. New equity can be introduced either in the form of cash or in kind. Where new equity will be introduced in the form of assets (in kind), the sum of these may not exceed the market value. Assets must be fully documented. Notional interest deduction (NID) will be given on new capital (share capital and share premium to the extent that they have been paid) issued as from 1st January 2015.

Interest. Notional interest deduction (NID) will be calculated on the amount of new share capital / share premium the same way as with interest on loans. The rate of notional interest deduction (NID) is defined as the 10 year government bond yield (at December 31 of the year preceding the tax year) of the country in which the new equity is invested, increased by 3% and having as a lower limit the 10 year Cyprus government bond increased by 3%.

Notional interest deduction (NID) is deducted from taxable income but it cannot exceed 80% of taxable income (as defined for tax purposes) before deducting Notional interest deduction (NID).

The Cyprus notional interest deduction (NID) applies to companies that are tax residents of Cyprus and to companies which are not resident in Cyprus but have a permanent establishment in Cyprus.

Cyprus Company illustrative example (In this case a Cyprus Company used as a Cyprus financing company)

– New equity is introduced in the Cyprus Company in a form of capital

– The Cyprus equity is used to finance other associated foreign companies i.e. by granting an interest bearing loan to foreign Company

– Associated foreign company will use the funds to finance its operations

– Cyprus Company receives income in a form of interest from foreign Company

– Cyprus Company pays dividends to foreign investor

 

 Illustrative example 1 of a Cyprus Company (Cyprus financing company)

New equity is introduced in the Cyprus Company in a form of capital €10m. The equity consist a mixture of share capital and share premium fully paid up

Cyprus Company grants an interest bearing loan to foreign Company. The other foreign company jurisdiction 10 year government bond is 0.5% and the the Cypriot 10 year government bond is for example 5.5%.

Cyprus Company receives income in a form of interest from foreign Company at the rate of 10%

CYPRUS COMPANY A (IN THIS CASE CYPRUS FINANCING COMPANY)		€
STATEMENT OF FINANCIAL POSITION
Assets
Loan receivable		10.000.000
Equity
Share Capital		10.000.000
INCOME STATEMENT
Interest received (10m x 10%)		1.000,000
Taxable income before Notional Interest Deduction		1.000.000
Cyprus Notional Interest Deduction is:
The higher of:
3.5% Foreign government bond rate + 3% X 10m	350.000
8.5% Cyprus government bond rate +3% X10m	850.000
And the lower of:
8.5% Cyprus government bond rate + 3% X10m	850.000
80% of taxable income i.e. X 1.000.000	800.000	800.000
Net interest income after Notional Interest Deduction		200.000
Cyprus tax at 12.5%		25.000
Effective tax on interest received		2.5%

 

Illustrative example 2

New equity is introduced in the Cyprus Company in a form of capital €10m. The equity consist a mixture of share capital and share premium fully paid up.

Cyprus Company grants an interest bearing loan to foreign Company. The other foreign company jurisdiction 10 year government bond is 0.5% and the Cypriot 10 year government bond is for example 4%.

Cyprus Company receives income in a form of interest from foreign Company at the rate of 10%

CYPRUS COMPANY A (IN THIS CASE CYPRUS FINANCING COMPANY)		€
STATEMENT OF FINANCIAL POSITION
Assets
Loan receivable		10.000.000
Equity
Share Capital		10.000.000
INCOME STATEMENT
Interest received (10m x 10%)		1.000,000
Taxable income before Notional Interest Deduction		1.000.000
Cyprus Notional Interest Deduction is:
The higher of:
3.5% Foreign government bond rate + 3% X 10m	350.000
7.0% Cyprus government bond rate +3% X10m	700.000
And the lower of:
7.0% Cyprus government bond rate + 3% X10m	700.000	700.000
80% of taxable income i.e. X 1.000.000	800.000
Net interest income after Notional Interest Deduction		300.000
Cyprus tax at 12.5%		37.500
Effective tax on interest received		3.75%

 

 Illustrative example 3

New equity is introduced in the Cyprus Company in a form of capital €10m. The equity consist a mixture of share capital and share premium fully paid up.

Cyprus Company grants an interest bearing loan to foreign Company. The other foreign company jurisdiction 10 year government bond is 3.75% and the Cypriot 10 year government bond is for example 3.50%.

Cyprus Company receives income in a form of interest from foreign Company at the rate of 10%

CYPRUS COMPANY A (IN THIS CASE CYPRUS FINANCING COMPANY)		€
STATEMENT OF FINANCIAL POSITION
Assets
Loan receivable		10.000.000
Equity
Share Capital		10.000.000
STATEMENT OF FINANCIAL POSITION
INCOME STATEMENT
Interest received (10m x 10%)		1.000,000
Taxable income before Notional Interest Deduction		1.000.000
Cyprus Notional Interest Deduction is:
The higher of:
6,75% Foreign government bond rate + 3% X 10m	675.000
6.50% Cyprus government bond rate +3% X10m	650.000
And the lower of:
6,75% Foreign government bond rate + 3% X 10m	675.000	675.000
80% of taxable income i.e. X 1.000.000	800.000
Net interest income after Notional Interest Deduction		325.000
Cyprus tax at 12.5%		40.625
Effective tax on interest received		4.06%

 

Cyprus Taxation Consequences

–     Low or no withholding tax on interest payments due to the “favorable” Cyprus double tax treaty network or EU directives

–     Deductability of interest expenses in the borrowing company

–     Provided that one of the major business activities of the Cyprus Company is that of financing activities, the Cyprus Company will be taxed at a Corporation tax rate of 12,5%

–     Cyprus Notional Interest Deduction (NID) is deducted from interest income and therefore Interest income is taxable in Cyprus at an effective tax rate of 2.5% i.e. (20% X 12.5% – 80% is given as a notional interest deduction)

–     No withholding tax on dividend payments from Cyprus at all times

Conclusion and our views

–     The law aimed to harmonize the tax treatment of equity finance with the tax treatment of finance by borrowing (equal treatment). It aimed also to further strengthen Cyprus companies’ competitiveness. Investors are financing their companies through equity instead through borrowings without entering in the process of creating complex corporate structures ‘back to back’ borrowing etc.

–     It is expected that there will be no law contradictions between EU and Cyprus as Notional Interest Deduction is already applied with success in other Member States. Furthermore legal advice was taken as to the compatibility with EU regulations and BEPS.

Since the Cyprus companies have the right to use and enjoy the interest received unconstrained, other countries could not argue that the Cyprus Company is not the beneficial owner. Therefore the treaties between Cyprus and foreign countries apply.

 

How PKF Can Help

We can review and evaluate your existing company structure taking into account the benefits of the new tax legislation.

Please contact us to share tax issues that concern you. All information is treated in strict confidence.

Contact details

Tel. +357 22 462727

Email: info@pkf-nic.om

(Published: Oct. 2015)

The authors expressly disclaim all and any liability and responsibility to any person, entity or corporation who acts or fails to act as a consequence of any reliance upon the whole or any part of the contents of this publication.

Accordingly no person, entity or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances.

PKF Cyprus firms are member firms of the PKF International Limited network of legally independent firms and do not accept any responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.