Are you looking to optimize your Cyprus company’s tax structure? While the standard corporate tax rate in Cyprus is 15%, the Notional Interest Deduction (NID) remains the most powerful tool for businesses to legally reduce their effective tax rate to as low as 2.5%.
In this guide, we break down how NID works in 2026, the latest reference rates, and how your business can benefit from financing through equity rather than debt.
What is Notional Interest Deduction (NID)?
Introduced under Article 9B of the Income Tax Law, NID is a tax incentive designed to level the playing field between equity and debt financing.
Historically, companies could deduct interest on loans (debt) but not the “cost” of using their own capital (equity). NID changes this by allowing a notional (theoretical) interest expense to be deducted from taxable profits based on “New Equity” injected into the company.
Who is Eligible?
- Cyprus Tax Resident Companies.
- Permanent Establishments (PEs) of non-resident companies in Cyprus.
- Requirements: The equity must be used to generate taxable income in the company.
The 2025 Reference Interest Rates
The NID is calculated by multiplying New Equity by a Reference Interest Rate.
As of January 2025, the reference rate is determined by the yield of the 10-year government bond of the country where the funds are employed (as of Dec 31, 2024), plus a 5% premium.
| Investment Country | 10-Year Bond Yield (Dec 31, 2024) | 2025 Reference Rate (Yield + 5%) |
| Cyprus | ~3.50% | 8.50% |
| Germany | ~2.80% | 7.80% |
| Ireland | ~3.20% | 8.20% |
Note: If the country of investment has no government bond, the Cyprus rate is used as the default.
The “80% Cap” Rule
To prevent companies from reaching a 0% tax rate, the Law imposes a restriction:
The NID deduction cannot exceed 80% of the taxable profit generated by the assets/activities financed by the new equity.
This is why the “magic number” in Cyprus SEO is 2.5%. Calculation: 12.5% (Standard Rate) x 20% (Remaining Taxable Base) = 2.5% Effective Tax Rate.
2025 Calculation Example (Actionable)
Let’s look at a practical scenario for a Cyprus company in 2025:
- New Equity Injected: €10,000,000 (used for Cyprus operations).
- 2025 Reference Rate: 8.5% (Cyprus bond + 5%).
- Annual Taxable Profit (before NID): €2,000,000.
| Step | Item | Calculation | Result |
| 1 | Potential NID | €10M x 8.5% | €850,000 |
| 2 | NID Cap (80%) | €2M x 80% | €1,600,000 |
| 3 | Allowable NID | Lower of Step 1 & 2 | €850,000 |
| 4 | Final Taxable Profit | €2,000,000 – €850,000 | €1,150,000 |
| 5 | Tax Payable (12.5%) | €1,150,000 x 12.5% | €143,750 |
Effective Tax Rate in this example: 7.18% (Significant savings from 12.5%!).
What Qualifies as “New Equity”?
“New Equity” refers to capital introduced after January 1, 2015. This includes:
- Paid-up Share Capital and Share Premium (issued and paid in cash or in-kind).
- Loans converted into shares.
- Shareholder credit balances converted into capital.
- Realized reserves created after 2015 and converted into capital.
Important: Revaluation reserves and pre-2015 reserves do not qualify.
Checklist: How to Claim NID Safely
To ensure your NID claim is accepted by the Cyprus Tax Department, follow this checklist:
- Substance: Ensure the company has actual economic substance in Cyprus.
- Matching Concept: Trace exactly which assets/activities the new equity is financing.
- Documentation: Maintain board resolutions and share certificates confirming the capital injection.
- Anti-Abuse Check: Ensure the transaction has a clear commercial purpose and isn’t just for tax benefit.
- Annual Election: NID is claimed annually on the tax return (Form TD4). It does not carry forward, use it or lose it.
Why Choose Cyprus for Your 2025 Company Formation?
The NID is just one piece of the puzzle. When you combine it with:
- 0% Withholding Tax on dividends to non-residents.
- 80% IP Box Exemption for tech companies.
- No Capital Gains Tax on the sale of securities (shares, bonds).
- Non-Dom Regime for individuals.
Cyprus remains the premier hub for international business in the EU.
Ready to Optimize Your Tax?
At Cyprus Company Formation, we specialize in structuring companies that maximize the NID and other local incentives.