Companies can be ﬁnanced via debt, equity or a combination of both. Debt – mostly in the form of loans – generates interest expense, which is usually a tax-deductible expense for the borrower. Equity on the other hand is associated with dividends, which are not deductible for tax purposes. This creates an incentive for companies to be funded via debt as opposed to equity. The Cypriot Notional Interest Deduction provisions (NID) introduced on 18 July 2016 aim to equalize this imbalance by introducing a servicing cost for equity. In simple terms, a Cyprus company ﬁnanced with new equity is eligible to an annual notional deduction like interest. This deduction, if properly structured, can signiﬁcantly reduce the taxable proﬁts of a Cyprus company to an eﬀective tax rate as low as 2,5%
HOW NID WORKS
But I must explain to you how all this mistaken idea of denouncing pleasure and praising pain was born and I will give you a complete account of the system, and expound the actual teachings of the great explorer of the truth, the master-builder of human happiness. No one rejects, dislikes, or avoids pleasure itself, because it is pleasure, but because those who do not know how to pursue pleasure rationally encounter consequences that are extremely painful. Nor again is there anyone who loves or pursues or desires to obtain pain of itself, because it is pain, but because occasionally circumstances occur in which toil and pain can procure him some great pleasure.
If properly structured and by taking advantage of the Cypriot NID provisions, the eﬀective tax rate of a Cypriot company can be as low as 2,5%. This, without using an oﬀshore jurisdiction or any complex/exotic arrangements. NID provisions apply to all Cyprus companies generating taxable income, including those providing ﬁnance, trading, licensing IP and other.