- Case: LOAN RESTRUCTURING OPPORTUNITY THROUGH NID
- Country: UKRAINE COMPANY “LOAN RESTRUCTURING OPPORTUNITY THROUGH NID
BACK-TO-BACK LOAN ARRANGEMENT
For example, instead of engaging the Cyprus Company through back-to-back loan arrangement, one can take advantage of the NID provisions and grant out a loan through own funds that were introduced in the share capital of the Cyprus Company.
CYPRUS RESIDENT COMPANIES
Cyprus resident Companies are entitled to a Notional Interest Deduction (NID) of up to 80% of their taxable income on qualifying new equity. Qualifying new equity includes share capital of any class and share premium issued and settled after 1 January 2015 paid either in cash or in kind.
EFFECTIVE TAX
The above provision, apart from reducing the effective tax of the Cyprus Company by up to 80% thereby decreasing the effective tax rate to as low as 2.5% can also allow for the Cyprus Company to be the beneficial owner of income. Especially in the cases where loans are granted by the Cyprus Company the resulting tax charge can be as low or even lower than in the case of using thin spreads (back-to-back arrangement).
Tax Computation:
Scenario: A Cyprus resident trading/financing Company issues new capital comprising of 1000 shares, with a nominal value of €1 each at a premium of €999 per share (total new equity €1.000.000). The funds are utilized in the business and generate income of i.e. €200.000. Reference Rate for year 2021 as published by the Cyprus Tax Department for funds employed in i.e. Ukraine at 11.052% (NID rate).
INCOME FROM APPLICATION OF NEW EQUITY200.000€
LESS: COST OF SALES – 100.000€
LESS: ADMINISTRATION EXPENSES – 30.000€
PROFIT BEFORE CLAIMING NID – 70.000€
LESS: NID – 0€
BEFORE RESTRICTION: – 110.520€
RESTRICTED 80% – 56.000€
TAXABLE PROFITS – 14.000€