Cyprus introduced provisions to allow notional deduction of interest in cases where funds are introduced to the company in the form of equity instead of interest bearing or interest free loans.

The main provision of the new law are:

  •  Deemed interest deduction will be allowed on “new equity funds” introduced into a Cyprus tax resident company and which funds are used for the operations of the company.
  • The deemed interest will be calculated on the basis of a “reference interest rate”. This rate is equal to the yield on the 10 year government bond of the country where the new funds are invested, plus 3%, with the minimum rate being the yield on the 10 year government bonds of Cyprus (currently around 5%), plus 3%.
  • New equity means any equity funds introduced into the business after 1 January 2015, but do not include capitalisation of reserves resulting from the revaluation of movable and immovable property.
  • Equity includes both share capital and share premium (ordinary or preference) to the extent that it has been actually paid.
  • The consideration for the issue of the shares can also be assets (other than cash) in which case the consideration cannot exceed the market value of the assets contributed (the valuation to the satisfaction of the Tax Commissioner).
  • Others forms of equity contribution are not acceptable.
  • The notional interest to be deducted cannot exceed 80% of the taxable income of the company for the year, before the deduction of this notional interest. Obviously, in the year of tax loss such, a benefit will be lost.
  • The deductibility of the deemed interest will be subject to the same rules as actual interest paid, i.e. will be tax deductible only if it relates to assets used in the business.
  • Claiming of the notional interest is at the discretion of the taxpayer on a year basis, so, if not beneficial, the taxpayer can avoid the claim.