On March 16, 2023, the Cyprus Tax Department released the 10-year government bond yield rates as of December 31, 2022. These rates, after being increased by 5%, can serve as reference rates for calculating the Notional Interest Deduction (NID) for 2023.
Comparison
A comparison with the previous year’s yield rates reveals a significant rise in the cost of borrowing, resulting from recent global political and economic developments. As a result, businesses may be incentivized to change from debt financing to equity financing. The increased NID rates now make the equity option even more attractive from a local and international tax standpoint.
Cyprus Tax Department NID rates for 2023 – Click here >>
NID
The NID is an annual notional interest expense that Cypriot tax resident companies (and non-resident companies with a permanent establishment in Cyprus), can claim if they finance their taxable business activities through “new funds” contributed to the company’s share capital on or after January 1, 2015. The NID is calculated by multiplying the “new equity” used to carry out taxable activities with the NID reference rate.
It’s worth noting that the 2023 NID rate, which is around 9% or more, depending on the country where the “new funds” are applied, could be higher than the actual interest possibly charged from a shareholder loan. Consequently, NID is a powerful tool for tax optimization that can significantly reduce the effective corporate income tax rate from 12.5% to as low as 2.5%.
From an international tax perspective, companies using their own funds instead of borrowed funds strengthen their position as the “beneficial owner” of the generated income, particularly in financing cases.
Benefits
In conclusion, the increase in 2023 NID rates offers additional motivation for companies to choose equity financing and move away from debt financing to maximize tax efficiencies.
Using its own funds also benefits the Cyprus company by fortifying local substance rules and beneficial ownership of the generated income. Companies with existing shareholder or related party loans towards a Cyprus company may wish to consider capitalizing such loans, making them qualified to claim NID.
Action
We encourage all eligible companies to consider taking advantage of NID to optimize their tax obligations.
Please contact us if you have any questions or require further assistance.