Special Defence Contribution for Companies

Special Contribution for Defence is imposed on dividend income, ‘passive’ interest income and rental income earned by companies tax resident in Cyprus and by individuals who are both Cyprus tax resident and Cyprus domiciled. It is charged at the rates shown in the table below:

Type of incomeCompanies
Dividend income from Cyprus resident companiesExempt (1)
Dividend income from non-Cyprus resident companiesExempt (2)
Active Interest (i.e. interest arising from the ordinary activities or closely related to the ordinary activities, such as financing)Exempt (3)
Passive Interest (i.e. other than active interest, such as interest from bank deposits)17% (4)
Rental income (reduced by 25%)3%
  1. Subject to certain anti-avoidance provisions (4-year rule), dividend income received by a Cyprus tax resident company from another Cyprus tax resident company is exempt from SDC. The 4 year rule does not affect Cyprus companies ultimately owned by non residents, or non-domiciled residents.
  2. Dividend income received by a Cyprus tax resident company from a non-Cyprus tax resident company is exempt from SDC. This exemption does not apply if:
  • The company paying the dividend is engaged directly or indirectly in its majority (>50%) in activities which result in investment income AND
  • The foreign tax burden suffered by the foreign company is significantly lower than the tax burden suffered by the Cyprus company (clarified as an effective tax rate of less than 6,25% on the profits distributed).When the exemption does not apply, the dividend income is subject to SDC at the rate of 17%.As from 1 January 2016, Special Contribution does not apply to dividends which are deductible for tax purposes by the paying company. In such cases, dividends are subject to corporation tax and not Special Contribution for Defence.
  1. Active interest is subject to  Corporation Tax.
  2. With effect as of 1 January 2024, the SDC rate on interest income has been reduced from 30% to 17%.

Compliance

SDC due on Cyprus sourced interest and dividends is withheld at source and is payable at the end of the month following the month in which they were paid.

SDC due on foreign sourced dividends, interest and rental income is payable in 6 month intervals on 30 June and 31 December each year.

SDC due on Cyprus sourced rental income where the tenant is a Cyprus company, partnership, the state or local authority, is withheld at source and is payable at the end of the month following the month in which it was withheld. In all other cases the SDC on rental income is payable by the landlord in 6 monthly intervals on 30 June and 31 December each year.

Foreign taxes paid can be credited against the SDC liability irrespective of whether there is a double tax agreement with the foreign country.

Deemed dividend distribution

A Cyprus tax resident company is deemed to distribute as a dividend 70% of its after tax accounting profits (as adjusted) two years from the end of the tax year in which the profits were generated. For example, the profits of 2019 are deemed to have been distributed as at 31 Dec 2021.

Such a deemed dividend distribution is reduced with payments of actual dividends paid during the relevant year the profits were generated and the two following years. On the remaining net amount (if any) of deemed dividend 17% Special Contribution for Defence is imposed to the extent that the ultimate direct/ indirect shareholders of the company are individuals who are both Cyprus tax resident and Cyprus domiciled (see Non-Domiciled page).

When an actual dividend is paid after the deemed dividend distribution date, then if Special Contribution for Defence is due on such a dividend, the 17% is imposed only on the amount of the actual dividend paid which exceeds the dividend that was previously deemed to have been distributed and previously suffered Special Contribution for Defence.

Disposal of assets to shareholder at less than market value

When a company disposes of an asset to an individual shareholder or a relative of his/her up to second degree or his/her spouse for a consideration less than its market value, the difference between the consideration and the market value will be deemed to have been distributed as a dividend to the shareholder. This provision, does not apply for assets originally gifted to the company by an individual shareholder or a relative of his up to second degree or his/her spouse.

Company dissolution

The cumulative profits of the last five years prior to the company’s dissolution, which have not been distributed or deemed to have been distributed, will be considered as distributed on dissolution and will be subject to Special Contribution for Defence at the rate of 17%. This provision does not apply in the case of dissolution under a Reorganisation only to the extent that the ultimate shareholders (direct or indirect) are individuals who are both Cyprus tax resident and Cyprus domiciled.

Reduction of capital

In the case of a reduction of capital of a company, any amounts paid or due to physical persons shareholders over and above the previously paid-in equity will be considered as dividends distributed subject to special Defence Contribution at the rate of 17% after deducting any amounts which have been deemed as distributable profits. The redemption of units or shares in a Collective Investment Scheme is not subject to the above provisions.

Disclaimer

Please note that the information provided here is for general guidance only and does not constitute professional tax advice. Tax laws and interpretations are subject to change, and individual circumstances can significantly affect tax obligations and benefits.

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For personalized tax advice tailored to your specific situation, we strongly recommend consulting with a qualified tax professional. Our team is equipped with the expertise to navigate the intricacies of Cyprus tax law and provide you with customized solutions. Contact us to ensure that you are making the most informed decisions for your tax-related matters.

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