P. Constantinou & Co. Ltd is an audit firm based in Limassol, Cyprus, which offers a full range of professional services for all types of businesses and moreover delivers personal service and advice.
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.
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 >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.
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.
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.