The Notional Interest Deduction (NID) is one of Cyprus's most powerful, yet least understood, fiscal instruments. It allows a Cypriot company to apply a notional interest deduction to new equity, which can reduce the effective corporate tax rate to 3%.
In this article, we explain how the NID works after the 2026 tax reform, with a concrete calculation example and the rules you need to pay attention to.
As of January 1, 2026, the Cypriot corporate tax rate is 15% (an increase of 12.5%, in line with the OECD Pillar Two minimum tax). Many older articles still calculate using the old rate and mention an effective minimum of 2.5%. That is no longer correct: the correct effective minimum under the NID is currently 3%. The NID regime itself has remained unchanged as a result of the reform.
What is the Notional Interest Deduction (NID)?
The Notional Interest Deduction is a tax incentive introduced by Cyprus in 2015 via Section 9B of the Cypriot Income Tax Law (N118(I)/2002). Its purpose is to treat equity financing the same as debt financing for tax purposes.
Traditionally, tax systems have favored debt financing: interest on loans is deductible, whereas the return on equity (dividends) is not. The NID corrects this imbalance. A company that contributes new capital receives a notional interest deduction as if it had borrowed that sum, even though there is no actual interest payment or cash flow.
The scheme applies to:
- Cypriot tax-resident companies;
- Cypriot permanent establishments of non-Cypriot companies.
How does Notional Interest Deduction (NID) work? The five core components
The annual NID deduction is calculated using a simple formula:
New equity × reference interest rate = notional interest deduction
1. New equity
Only capital contributed to the company after 1 January 2015 counts as “new equity”. Moreover, it must be used to generate taxable income.
2. Reference interest rate
The reference interest rate is equal to the yield on the 10-year government bond of the country where the equity is deployed, plus a surcharge of 5%. A lower limit applies: at least the yield on the Cypriot 10-year government bond plus 5%. With a Cypriot bond yield of approximately 3%, the minimum reference interest rate therefore amounts to about 8%.
3. Ceiling of 80%
The NID deduction may not exceed 80% of the taxable profit arising from the new equity, calculated before the application of the NID. As a result, the effective corporate tax rate can decrease to 3% (20% of 15%).
4. Annual and non-transferable
The NID can be claimed year after year as long as equity is present and productively utilized. There is no end date. Important: an unused NID is not transferable to the following year, unlike tax losses. Whatever you do not utilize in a given year is lost.
5. The NID cannot create a loss
The deduction can reduce taxable profit by up to 80%, but can never cause or increase a tax loss.
What counts as “new equity”?
This is where much online explanation goes wrong. Under Article 9B, only genuine, new capital contributions qualify:
| Is eligible | Not eligible |
|---|---|
| Fully paid-up share capital (ordinary or preferred shares) | Revaluation of existing assets |
| Share premium | Conversion of reserves accrued before 2015 or retained earnings into capital |
| Cash contribution | Capital not used for taxable activities |
| Contribution in kind (for example, real estate or intellectual property), up to market value | “Window dressing”: capital contributed solely to create the deduction |
The conversion of existing retained earnings or reserves into capital therefore does not. The law exclusively rewards genuine new capital injections. This distinction is often misrepresented online, so always verify the source of the capital before building up a claim.
Calculation example: NID in practice
Take an entrepreneur who runs a software company through a Cypriot Ltd and contributes €1,000,000 in new equity to finance the company. The taxable profit for the year amounts to €400,000.
| New equity | €1.000.000 |
|---|---|
| Reference interest rate (10-year bond + 5%) | 8% |
| Fictitious interest deduction (NID) | €80.000 |
| Taxable profit before NID | €400.000 |
| Ceiling (80% of €400,000) | €320,000 → full €80,000 allowed |
| Taxable profit after NID | €320.000 |
| Corporate income tax (15%) | €48.000 |
| Tax without NID | €60.000 |
| Annual savings | €12.000 |
In this example, the effective corporate tax rate decreases from 15% to 12%, and this saving recurs every year as long as the capital remains present. The greater the contributed equity relative to profit, the stronger the effect, until the ceiling of 80% of taxable profit is reached.
The real power: combining NID with IP Box and Non-Dom
The NID is interesting in itself, but the return only becomes truly high when you stack three regimes. This is where specialized structuring makes the difference.
- NID + IP Box: For software- and IP-driven companies, the IP Box regime reduces the tax on qualifying IP profits to an effective rate of 3% (80% of the IP profits are exempt). The NID can be applied in addition to this to the non-IP portion of the profit.
- NID + Non-Dom: An entrepreneur with Cypriot Non-Dom status pays 0% on distributed dividends for 17 years. The only levy is the contribution to the GeSY healthcare system of 2.65%, with an annual ceiling of €4,770. Consequently, what remains of the company after NID and IP Box flows to the shareholder virtually tax-free.
The net effect: a well-structured Cypriot company with substance can achieve a combined tax burden rarely matched anywhere in Europe. However, the stacking requires proper documentation and real economic activity. Our accountants and tax advisors assess on a case-by-case basis which combination is feasible.
What changed with the 2026 tax reform?
The Cypriot tax reform of January 1, 2026, is the largest revision in decades. The relevant points for NID planning:
- Corporate income tax: 12.5% → 15%. As a result, the effective NID minimum shifts from 2.5% to 3%.
- Deemed Dividend Distribution (DDD) abolished for profits from 2026. Companies are no longer required to distribute notional dividends on retained earnings, which simplifies cash flow planning.
- Loss carry-forward extended from 5 to 7 years.
- NID, IP Box, and the R&D super deduction are retained.
Anti-abuse rules and points of attention
The NID introduces strict anti-abuse provisions, in addition to a general anti-abuse rule.
Pay attention to the following points:
- Capital contributed solely to generate the deduction, without economic reality, is rejected.
- The origin of the capital must be demonstrably new (no repackaging of old reserves).
- The contribution in kind may not exceed the market value and must be substantiated.
- The documentation (shareholder resolutions, capital increases, share premium registration, proof of payment) must be conclusive.
- If the capital is used only partially for taxable activities, the deduction is limited proportionally.
Who is the NID interesting for?
The NID yields the most for structures financed with equity rather than debt:
- Holding companies and investment SPVs;
- Financing and treasury vehicles within international groups;
- Software- and IP-driven enterprises (in combination with the IP Box regime);
- Entrepreneurs who reinvest their profits instead of lending them out.
Curious what the NID can do for you?
We calculate your actual savings and determine whether NID, IP Box, and Non-Dom can be combined in your situation. Schedule a consultation.
Frequently asked questions about the Notional Interest Deduction
Can retained earnings or reserves qualify as new equity?
No. Only fresh contributions in cash or in kind from 1 January 2015 qualify under Article 9B. The conversion of existing reserves or retained earnings into capital does not count.
Can the NID cause a tax loss?
No. The NID can reduce taxable profit by up to 80%, but can never create or increase a loss.
Does the NID also apply to foreign companies?
Only Cypriot tax-resident companies and Cypriot permanent establishments of non-resident companies can claim the NID.
How is the reference interest rate determined?
The reference interest rate is the yield on the 10-year government bond of the country where the equity is deployed, plus 5%, with a lower limit of the Cypriot 10-year bond yield plus 5%.
Can the NID be combined with the IP Box regime?
Yes. The combination of NID and IP Box, optionally supplemented with Non-Dom status, leads to very efficient tax planning and is one of the most widely used structures in Cyprus.
Will the NID still exist after the tax reform of 2026?
Yes. The NID scheme remained unchanged due to the 2026 reform. Only the effective minimum rate shifted from 2.5% to 3% due to the increase in corporate tax to 15%.
