Notional Interest Deduction Estimator

The notional interest deduction gives a company funded by equity a deduction comparable to the interest it would have deducted had it borrowed instead. No cash leaves the company to obtain it.

The reference rate

The rate is the yield on ten year government bonds as at 31 December of the prior tax year, for the country where the funds are employed in the business, plus a 5 percent premium. Where funds are deployed in a higher yielding jurisdiction, the reference rate rises with it, which is why the applicable rate is a question of where the money went rather than where the company sits.

Why the ceiling usually binds

The deduction cannot exceed 80 percent of the taxable profit derived from the assets that the new equity financed, measured before the NID. Two consequences follow. The NID can never create or increase a loss, and a company with large equity but modest profit from it will find the ceiling, not the rate, sets the deduction.

Because 20 percent of the relevant profit always remains taxable, the lowest effective rate the NID alone can produce is 3 percent, being 20 percent of profit taxed at 15 percent.

What this does not do

• It does not test whether the equity qualifies. Equity introduced before 1 January 2015 does not, and anti-avoidance provisions restrict equity that derives from reserves already in existence or from related-party arrangements.
• It does not attribute profit to financed assets. Identifying the profit derived from the assets the new equity funded is the substantive work, and it is the figure most often asserted rather than supported.
• It does not model the annual election available to claim only part of the deduction.
• It does not combine with the IP Box. Where both apply, ordering and interaction need separate analysis.