The Notional Interest Deduction (NID) allows a Cypriot company to apply a notional interest deduction to new equity, without any interest ever being paid. With a sufficiently large capital contribution, the effective corporate tax rate drops from 15% to 3%.
Below is how it works after the 2026 reform, with a calculation example and the rules you need to pay attention to.
Since January 1, 2026, the Cypriot corporate tax is 15% (from 12.5%, in line with OECD Pillar Two).
Older articles still mention an effective minimum of 2.5%; that is no longer correct. The correct minimum under the NID is currently 3%. The scheme itself remained unchanged by the reform.
The Notional Interest Deduction is a tax incentive from 2015 (section 9B, Income Tax Law N118(I)/2002) that equates equity to debt for tax purposes.
Interest on loans is deductible, but the return on equity is not. The NID corrects this imbalance: if you contribute new capital, you receive a notional interest deduction as if you had borrowed it, even though there is no cash flow or interest payment.
The scheme applies to Cypriot tax-resident companies and to Cypriot permanent establishments of non-Cypriot companies.
The deduction is simple: new equity × reference interest rate = notional interest deduction.
This is where much of the explanation online goes wrong: Only genuine, new capital contributions qualify. The conversion of reserves accrued before 2015 or retained earnings does not count.
(See the first table at the bottom: “new equity / not”.)
| Is eligible | Not eligible |
|---|---|
| Fully paid-up share capital (ordinary or preferred) | Revaluation of existing assets |
| Share premium | Conversion of reserves or profit from prior to 2015 |
| Cash contribution | Capital not used for taxable activity |
| Contribution in kind up to market value (real estate, IP) | "Window dressing" solely to create the deduction |
Do you want to reduce your tax burden in Cyprus even further? This might be possible via IP Box and/or Notional Interest Deduction.
We are happy to help you further.
The strength of the NID depends on the ratio between your contributed capital and your profit. Two scenarios, both with a reference interest rate of 8.5%, 15% corporate income tax, and €400,000 in taxable profit:
(See the second responsive table at the bottom: “NID scenarios”.)
With a modest contribution (€1,000,000), your effective rate drops to approximately 11.8%. With a large contribution that reaches the 80% ceiling (€4,000,000), it drops to exactly 3%, and that saving recurs every year as long as the capital remains in place.
The higher your equity relative to profit, the closer you get to the minimum of 3%.
The NID yields the strongest results when combined with other regimes.
For software- and IP-driven companies, the IP Box regime reduces the tax on qualifying IP profits to an effective rate of approximately 3% (80% of the IP profits are exempt); the NID is applied to the non-IP portion.
An entrepreneur with Non-Dom status pays an additional 0% on distributed dividends for 17 years, with the only levy being the GeSY contribution of 2.65% (capped at €4,770/year).
What remains of the company after NID and IP Box therefore flows to the shareholder virtually tax-free.
The stacking requires real economic activity and conclusive documentation. Our accountants assess on a case-by-case basis which combination is feasible.
| Parameter | Scenario A | Scenario B |
|---|---|---|
| New equity | €1.000.000 | €4.000.000 |
| Notional interest deduction (8.5%) | €85.000 | €340.000 |
| Ceiling (80% of €400,000) | €320.000 | €320.000 |
| Allowed NID | €85.000 | €320,000 (capped) |
| Taxable profit after NID | €315.000 | €80.000 |
| Tax (15%) | €47.250 | €12.000 |
| Tax without NID | €60.000 | €60.000 |
| Effective rate | 11,8% | 3,0% |
The NID introduces specific anti-abuse provisions plus a general anti-abuse rule.
In 2026, the Tax Department looks primarily at the actual deployment of capital.
NB:
Especially for structures financed with equity rather than debt: holding companies and investment SPVs, financing and treasury vehicles within international groups, software and IP companies (with IP Box), and entrepreneurs who reinvest profits.
We calculate your actual savings and determine whether NID, IP Box, and Non-Dom can be combined in your situation.
Relevant information
Any questions? Feel free to ask us!
No. Only fresh contributions in cash or in kind from 1 January 2015 qualify under Article 9B. Conversion of existing reserves does not count.
No. The NID reduces profit by a maximum of 80%, but can never create or increase a loss.
Only for Cypriot tax-resident companies and Cypriot permanent establishments of non-resident companies.
The yield on the 10-year government bond of the country where the capital is deployed, plus 5%. In the case of a negative bond yield, zero applies, so a minimum of 5%.
Yes. NID plus IP Box, optionally supplemented with Non-Dom, is one of the most commonly used structures in Cyprus.
Yes. The scheme remained unchanged. Only the effective minimum shifted from 2.5% to 3% due to the increase in corporate income tax to 15%.
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