In brief

On 5 June 2020 the Cyprus Parliament voted to amend the provisions of the Cyprus NID regime. The amendments will become law following publication in the Cyprus Gazette, which is expected to take place shortly.

Amendments relating to the annual NID rate are applicable as from the start of the current tax year (1 January 2020). They reflect that in calculating the annual NID rate, which is the yield rate of the 10-year government bonds of the country where the funds are employed in the business of the company plus a premium: (i) the premium is to be set at 5% (currently the premium is set at 3%), and, (ii) the Cyprus government bond yield rate is no longer to be used as a minimum rate for the government bond yield part of the NID rate calculation.

Other amendments relate to:

i. the capitalisation of reserves that existed prior to the introduction of the NID regime in Cyprus in 2015; this amendment will be applicable from 1 January 2021, and

ii. the income tax law wording regarding the cap on the annual NID amount (calculated by reference to 80% of taxable profits) to better express the original policy intent of the legislator and common practice of "matching" the NID to taxable income generated from the application of "new equity", as already set out in the Cyprus tax authorities (CTA) Circular and applicable since the introduction of the Cyprus NID regime in 2015 (i.e. as from 1 January 2015).

In detail

The amendments to the Cyprus NID regime set out below were approved by the Cyprus Parliament on 5 June 2020, and will become law following publication in the Cyprus Government Gazette, which is expected to take place shortly.

Amendments to the annual NID rate Under the current Cyprus NID provisions the annual NID rate is determined by reference to the yield rate of the 10-year government bonds of the country where the funds are employed in the business of the company plus a 3% premium. This is subject to a minimum rate, which is the yield of the 10-year Cyprus government bond plus 3% premium. Following the amendments, with effect from 1 January 2020:

i. the premium is set at 5% rather than the current 3% premium rate;

ii. the annual Cyprus NID rate will be determined only by reference to the yield rate of the 10-year government bonds of the country where the funds are employed in the business of the company. As such, the Cyprus NID regime will no longer refer to the yield of the 10-year Cyprus government bond (plus a premium) as being a minimum rate.

Other amendments

i. Company reserves that existed prior to the introduction of the Cyprus NID provisions (i.e. 'old' reserves existing prior to 1 January 2015) and which are 'capitalised' post 1 January 2015 will no longer be eligible to be included in the amount of qualifying equity for the purposes of the annual NID calculation. Currently such capitalised 'old' reserves are eligible to be included in the amount of qualifying equity in cases where they satisfy certain conditions. This amendment is effective as from 1 January 2021
This amendment does not impact company reserves created as from 1 January 2015. Such 'new' reserves remain eligible, under conditions, for 'capitalisation' into qualifying equity.

ii. The cap applicable on the annual NID amount, which is calculated by reference to 80% of taxable profits, has amendments which aim to better express the original policy intent of the legislator on how the cap mechanism works "matching" the NID with the taxable income generated from the application of "new equity"; this original policy intent has already been applied in practice as it had been clarified by the CTA in their Circular on the practical application of the Cyprus NID, and as such these amendments have practically been respected since the introduction of the Cyprus NID regime back in 2015 (i.e. as from 1 January 2015). For more information on the CTA Circular please refer to our newsletter N-10-2016.

EU Code of Conduct Group (Business Taxation) (the Group)

Along with all EU Member States' NID regimes the Cyprus NID regime has been reviewed by the Group from a harmful tax perspective. The voted amendments are in part due to recommendations of the Group based upon their review and comments. It is expected that following these amendments the Group will positively finalise their review of the Cyprus NID regime since its introduction as from 1 January 2015.

Background of the Cyprus NID regime

With effect from 1 January 2015, Cyprus introduced for tax purposes an annual NID on new equity of companies. New equity being paid-up share capital and share premium introduced to a company as from 1 January 2015.

The annual NID amount is calculated as a NID rate applied to the eligible share capital / premium. The NID rate is defined as the yield rate of the 10-year government bonds (as at 31 December of the prior tax year) of the country where the funds are employed in the business of the company plus a premium. The annual NID amount is subject to a cap which is calculated by reference to 80% of "matched" taxable profits.

The takeaway

Companies should review their calculations for their 2020 annual NID amount in order to assess whether their annual NID amount is impacted by the amendments within the framework of the upcoming 31 July 2020 deadline for the submission of the 2020 provisional corporate income tax return and payment of the first instalment of 2020 provisional corporate income tax.

Those companies that did not follow the original policy intent of "matching" as set out in the relevant CTA Circular and did not cap their annual NID amount on the basis of the "matching" concept may need to consider how their filing positions of prior years may be impacted. Such companies should have declared this non-compliance with the relevant Circular upon submission of their corporate income tax return to the CTA.

Originally published 10 June, 2020.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.