How Notional Interest Deduction is calculated
NID is calculated by multiplying the New Capital introduced in the company with a Reference Rate. By way of a restriction, the NID deduction cannot exceed 80% of the taxable income generated via application of the new capital funds and the total income generated by all the assets and activities resulting from New Capital funds.
What is New Capital
From 1 January 2021
“New Capital” is defined as equity introduced into the business on or after 1 January 2015. As of 1 January 2021, the NID can no longer be claimed on equity arising from the capitalization of pre-existing reserves (reserves existing on 31 December 2014).
New Capital generally represents shares of any type and class issued and paid after January 2015. The following may also be considered as New Capital funds:
- Unpaid share capital for which the company has recognized the claim of the receivable.
- Issue of share capital by the capitalization of reserves created after January 2015.
- Issue of share capital by conversion of loans payable and other lending products.
- Issue of share capital by conversion of non-refundable capital contributions.
Asset contributions and the resulting issue of share capital can also be recognized as New Capital subject to the fulfillment of certain conditions.
Until 31 December 2020
“New Capital” represents equity introduced into the business on or after 1 January 2015, excluding equity created from the capitalization of reserves existing on 31 December 2014 (pre-existing reserves), unless the equity created from the pre-existing reserves is invested in (business) assets earning taxable income which did not exist on 31 December 2014.