The Cyprus notional interest deduction (NID) under the 15% corporate tax rate, with examples

The 2026 reform raised the Cyprus corporate tax rate from 12.5% to 15%, and most commentary stopped there. However, the reform left the Cyprus notional interest deduction (NID) untouched. A higher headline rate therefore makes the NID more valuable, not less. For a company funded with equity, it can bring the effective rate on qualifying profit down to 3%.

How the notional interest deduction works in Cyprus

Debt has always enjoyed a tax advantage over equity. A company that borrows deducts its interest. However, a company funded by its shareholders deducts nothing, even though that capital carries a cost. Cyprus introduced the notional interest deduction in 2015 through Article 9B of the Income Tax Law to remove that bias.

A company that introduces new equity into its business may deduct notional interest on it. The NID works as though the company had borrowed the money at a reference rate. Yet the company pays no interest and no cash leaves the business. The deduction simply sits on top of its ordinary deductions and reduces taxable income directly.

Why the 2026 reform makes the NID more valuable

The 2026 reform did not amend the NID, and the amending Income Tax Law 244(I)/2025 leaves Article 9B untouched. What changed is the rate the NID shelters. Every euro of notional interest now saves 15 cents of tax rather than 12.5.

In the second example below, a deduction that saved €80,000 of tax in 2025 saves €96,000 in 2026. That is an increase of one fifth.

The cap on the deduction also sets a floor on the tax. The NID cannot exceed 80% of the taxable income that the new equity generates. Therefore, where the cap applies, 20% of that income remains taxable. At 15%, the effective rate on that income is 3%.

Who can claim the NID in Cyprus

The Cyprus notional interest deduction is available to any Cyprus tax resident company. It is also available to a non-resident company that carries on business in Cyprus through a permanent establishment. For a permanent establishment, the Tax Department measures new equity as the increase in its funding over the level at 31 December 2014. It uses the average for the year and ignores current account balances of a trading or temporary nature.

What counts as new equity for the NID

Equity means issued share capital and share premium, to the extent paid up. New equity is equity that a company introduces into its business on or after 1 January 2015. Old equity is what the company had at 31 December 2014, and only equity above that level counts.

The law sets two exclusions. First, capital created by capitalising a revaluation of movable or immovable assets is not new equity. Second, capital introduced after 2015 does not count if it derives from reserves the company held at 31 December 2014. This applies whether the link is direct or indirect.

The Tax Department’s circular on the deduction, EE 2016/10, sets out its practice on the detail. Under the circular, new equity covers shares of any class, together with their share premium. Ordinary, preference, redeemable and convertible shares all qualify if issued and paid up from 2015 onwards.

The circular also accepts capital created by converting a shareholder loan, bonds or other debt into shares. The same applies to capitalising realised reserves created after 1 January 2015. A capital contribution made without an issue of shares counts only once a share issue capitalises it. Unpaid capital can count where the company carries a matching receivable that earns taxable interest.

One point deserves attention from groups considering a move to Cyprus. Under the same circular, a company that transfers its tax residence here after 1 January 2015, whether by redomiciling or by moving its management and control, treats its entire paid-up share capital and share premium at the date of transfer as new equity.

Where the company already had a Cyprus permanent establishment at 31 December 2014, its capital counts as old equity up to the amount of that establishment’s funding, and only the excess is new. Therefore, a company arriving with a strong balance sheet can claim the NID on most or all of its capital from its first year.

How the NID reference rate works

The NID reference rate starts with the ten-year government bond yield of the country where the company invests the new equity. The law then adds five percentage points and fixes the rate at 31 December of the year before the tax year. Where that country had issued no government bond by that date, the Cyprus ten-year yield plus five points applies instead. That is a fallback, not a minimum.

The country of investment therefore matters. Equity used in the Cyprus business takes the Cyprus yield, while equity lent to a subsidiary abroad takes that country’s yield.

Commentary written before 2020 refers to a premium of three points and a Cyprus minimum rate. Both changed from tax year 2020, so those older figures no longer apply.

The limits on the Cyprus notional interest deduction

The NID cannot exceed 80% of the net taxable income that the new equity generates, computed before the deduction. Furthermore, the cap applies separately to the income from each asset the new equity finances. Where the new equity produces a net loss, the company gets no deduction, so the NID cannot create or increase a loss.

The NID also runs only for the part of the year the equity belonged to the business. Equity introduced mid-year therefore gives a time-apportioned deduction in its first year.

Several integrity rules sit alongside. Where new equity passes from one Cyprus company to another, only one of them may claim. Where borrowing with deductible interest funds the new equity, the NID falls accordingly.

The law also treats the NID as interest, so the Article 11(15) restriction on interest attributable to non-business assets applies to it. Equity contributed in kind counts only up to the documented market value of the assets at that date. In a tax-neutral reorganisation, the company computes the NID as though the reorganisation had not taken place.

Finally, the Commissioner may deny the NID for arrangements without a genuine commercial or economic purpose. This applies in particular where a group recycles pre-2015 equity through connected-party transactions and presents it as new. Within those limits, the company chooses each year whether to claim the deduction in full, in part or not at all.

How to calculate the notional interest deduction in Cyprus

A claim follows six steps.

1. Establish the company’s new equity. For a company that existed before 2015, this means its equity at 31 December 2014 and every capital movement since. Exclude any capitalised revaluation of assets, and anything derived from reserves held at 31 December 2014.
2. Match the new equity to the assets or activities it finances, since Department practice is to claim the NID asset by asset. Where the company cannot trace new equity, the Department treats it as financing assets or activities that do not produce taxable income first. Only the balance spreads pro rata across income-producing assets.
3. Fix the reference rate for each country of investment at 31 December of the preceding year.
4. Calculate the notional interest, time-apportioned for any equity introduced during the year.
5. Compute the net taxable income of each asset, using the Department’s methods for attributing interest and overheads. Then apply the 80% cap to each asset.
6. Decide how much to claim, and keep the file that supports every figure.

NID worked examples

The examples assume a ten-year government bond yield of 3%, giving a reference rate of 8%. Actual yields change each year and the rate locks at 31 December of the preceding year. The figures illustrate the mechanics rather than any particular country.

Example 1. A trading company where the full deduction is allowed

Shareholders subscribe €2,000,000 of new shares in 2026, used throughout the year in the company’s Cyprus business. The assets financed generate net taxable income of €600,000.

The notional interest is well below the cap, so the company deducts it in full.

Example 2. A financing company where the cap applies

Shareholders capitalise a Cyprus company with €10,000,000 of new equity, which it lends to a subsidiary abroad. It earns interest of €900,000 and incurs directly attributable costs of €100,000.

Here the cap decides the answer. At a 6% yield in the borrower’s country, the notional interest would rise to €1,100,000, yet the NID would still be €640,000. For a financing company earning a normal margin, the cap usually determines the result, and that result is an effective 3%. At the pre-reform rate of 12.5%, the same deduction saved €80,000.

Example 3. Equity introduced during the year

A company receives €4,000,000 of new equity, paid up on 1 July 2026. The full-year notional interest at 8% would be €320,000. The equity belonged to the business for only half the year, so the 2026 deduction is €160,000, subject to the cap. From 2027 the full year counts, at that year’s reference rate.

Example 4. Capital that sits idle

Shareholders subscribe €3,000,000 of new shares in 2026. The company has not yet put the money to work, and it sits in a bank account that earns nothing.

The notional interest of €240,000 counts for nothing. The equity is not used in the business and generates no taxable income. The 80% cap is therefore nil, and so is the deduction. The NID follows the equity only once the company puts it to work in assets or activities that produce taxable income.

Example 5. Equity that funds an asset with no taxable income

A company uses €5,000,000 of new equity to acquire shares in a subsidiary. The dividends it receives are exempt from Cyprus income tax, so the shareholding generates no taxable income.

The same result follows for any asset whose income is exempt from income tax. This is why matching matters. Where new equity in fact funds a trading activity, the company should trace it there and document the link when the money goes in. Where it cannot be traced, the Department treats it as funding assets that produce no taxable income first.

How the NID works with the rest of the Cyprus tax system

The NID combines well with the other features of a Cyprus structure. Profits distributed to shareholders who are Cyprus tax resident but not domiciled carry no special defence contribution. Where equity finances an intangible within the IP box, the NID attributable to it counts as a direct cost in computing qualifying profit. The two reliefs therefore do not stack on the same income.

From 2026, a company’s gains on disposing of crypto-assets are taxed at a flat 8% under the new Article 20E. The law does not exclude these gains from the NID, so a claim may be worth considering where new equity funds crypto-assets. A ruling is advisable before relying on it.

Where NID claims go wrong

Most challenged NID claims fail on the facts rather than the law. Some companies never match equity to assets, which leaves the claim unsupported. Others apply the cap to total profit rather than asset by asset, or claim in full on equity funded by deductible borrowing. The remedy in every case is the same, a clear record built when the equity goes in rather than reconstructed at the audit.

The practical position

The Cyprus notional interest deduction is one of the most valuable provisions in the tax system, and the reform has increased its value. For any group that finances a Cyprus company, or plans to move one here, the choice between equity and debt deserves a fresh look.

We advise on the structuring, calculation and documentation of the NID. If you would like to know what it could be worth to your company, contact Nikita & Partners.

Common questions about the Cyprus notional interest deduction

What is the notional interest deduction in Cyprus?

It is a deduction under Article 9B of the Income Tax Law that treats new equity as though it were a loan. The company deducts notional interest on equity introduced from 1 January 2015 onwards, without paying any or moving any cash. Under the 15% corporate tax rate, it can bring the effective rate on qualifying profit down to 3%.

Did the 2026 tax reform change the Cyprus NID?

No. The 2026 reform raised the corporate tax rate from 12.5% to 15%, but the amending law, 244(I)/2025, did not touch Article 9B. The reference rate, the 80% cap and the definition of new equity all work as before. Every euro of notional interest now saves 15 cents of tax rather than 12.5, so the NID is worth one fifth more.

Who can claim the notional interest deduction in Cyprus?

Any Cyprus tax resident company can claim it, and so can a non-resident company with a permanent establishment in Cyprus. The new equity must fund assets or activities that produce taxable income, because the deduction cannot exceed 80% of that income. Equity that sits idle in a bank account earning nothing, or funds an asset with exempt income such as a shareholding, gives no deduction.

How is the NID rate calculated in Cyprus?

The reference rate is the ten-year government bond yield of the country where the company invests the new equity, plus five percentage points. Equity used in the Cyprus business takes the Cyprus yield, while equity lent to a subsidiary abroad takes that country’s yield. The rate locks at 31 December of the preceding year, and where that country has no government bond, the Cyprus ten-year yield plus five points applies instead.

What is the maximum notional interest deduction in Cyprus?

The NID cannot exceed 80% of the net taxable income that the new equity generates, measured asset by asset rather than against total profit. Where the cap applies, 20% of that income stays taxable, so at 15% the effective rate on it is 3%. For a financing company earning a normal margin, the cap rather than the reference rate usually decides the result.

Can the notional interest deduction create a tax loss in Cyprus?

No. Where the new equity produces a net loss, the company gets no deduction, so the NID can neither create nor increase a loss. The 80% cap also keeps at least 20% of the income from the new equity within the tax charge. Each year, the company decides whether to claim the NID in full, in part or not at all.

Does a shareholder loan converted into shares qualify for the NID?

Yes. Under circular EE 2016/10, capital created by converting a shareholder loan, bonds or other debt into shares counts as new equity. So do realised reserves created after 1 January 2015 and later capitalised. A capitalised revaluation of movable or immovable assets does not qualify, and a capital contribution without a share issue counts only once a share issue capitalises it.

Can a company that moves to Cyprus claim the NID?

Yes, and often on its full capital. Under circular EE 2016/10, a company that transfers its tax residence to Cyprus after 1 January 2015, whether by redomiciling or by moving its management and control here, treats its entire paid-up share capital and share premium at the date of transfer as new equity. Where it already had a Cyprus permanent establishment at 31 December 2014, its capital is old equity up to that establishment’s funding, and only the excess qualifies. Subject to the 80% cap, a well-capitalised company can claim the deduction from its first year.

How does the NID work for equity introduced during the year?

The NID runs only for the part of the year that the new equity belonged to the business. At a reference rate of 8%, €4,000,000 paid up on 1 July 2026 gives a 2026 deduction of €160,000 rather than the full-year €320,000. From 2027 the full year counts at that year’s reference rate, and the 80% cap applies in every year.

What records does a company need to support an NID claim in Cyprus?

A company needs a record of every capital movement that created new equity, matched to the assets or activities it finances. It also needs the reference rate for each country of investment and the net taxable income of each asset or activity, so it can apply the 80% cap. The record is strongest when the company builds it as the equity goes in, not at the audit.