A powerful but underused Cyprus tax incentive most companies overlook

💡The Notional Interest Deduction (NID) in Cyprus

Many business owners are not aware that Cyprus allows a deduction on equity, not just on loans.
This incentive, found in Article 9B of the Income Tax Law (L.118(I)/2002), aims to remove the tax bias between debt and equity financing.

In simple terms:
When a company issues new equity (share capital or share premium) and uses those funds in its business, it may claim a Notional Interest Deduction (NID) each year.
This is a theoretical interest expense, reducing taxable profits without any actual borrowing.

How it works

The annual deduction is based on:

New equity × (Reference Rate + 5%)

The Reference Rate is the yield of the 10-year government bond issued by the country in which the new equity is invested. The bond yield applicable is the one preceding the tax year to which it relates.
For 2024, the Cyprus 10-year yield was 2.98%, meaning the NID rate for 2025 is:

2.98% + 5% = 7.98%

The deduction is capped at 80% of taxable profit before NID.

Example

A Cyprus company reports €80,000 taxable profit for 2025.
The shareholders inject €500,000 new share capital during the year, used in the business for: the purchase of additional stock, marketing expenses, hiring new staff and upgrading IT systems and premises.

👉Calculation of NID: €500,000 x 7.98% = €39,900

Since this is below the 80% cap (€64,000), the full €39,900 is deductible.

📊Example – Before vs After NID

Without NID:

• Taxable profit: €80,000

• Corporate tax (12.5%): €10,000

With NID:

• NID deduction: €39,900

• Adjusted profit: €40,100

• Tax (12.5%): €5,012.50

💡 Tax saving: €4,987.50 (effective rate: 6.3%)

Result

By financing through equity instead of debt, the company effectively reduces its corporate tax rate by half, while strengthening its balance sheet and remaining fully compliant with Cypriot tax legislation.

📢 Few companies take advantage of this, yet the savings can be substantial.