Special Defence Contribution for Companies

Special Defence Contribution (SDC) is imposed on certain categories of income earned by companies tax resident in Cyprus and by individuals who are both Cyprus tax resident and Cyprus domiciled. From 2026, the SDC regime has undergone significant changes affecting dividend rates, interest income treatment, and the abolition of deemed dividend distribution rules.

Dividend Income – Cyprus Resident Companies

Dividend income received by a Cyprus tax resident company from another Cyprus tax resident company is generally exempt from SDC. However, two transitional exceptions apply to pre-2026 profits, together ensuring that all profits earned before 2026 remain within the SDC net under appropriate conditions. Both exceptions cease to apply where the dividend ultimately corresponds to a non-Cyprus tax resident individual or a Cyprus tax resident non-domiciled individual.

SDC Transitional Exceptions — Pre-2026 Profits

The SDC Law contains two separate but complementary transitional provisions imposing 17% SDC on dividends paid from pre-2026 profits between Cyprus tax resident companies. Together they cover all profits earned up to 31 December 2025, as highlighted by the December 2025 reform.

Exception 1 — Indirect dividends from pre-2024 profits (Section 3(1)(β)(i)): Where a Cyprus company receives a dividend indirectly from another Cyprus company, and more than four years have elapsed since the end of the tax year in which the underlying profits were generated, 17% SDC applies. This provision is explicitly limited to:

• Profits earned up to and including tax year 2023, AND
• Dividends received within six (6) years from the December 2025 reform effective date (i.e., no later than 31 December 2031).

Exception 2 — Direct dividends from 2024/2025 profits (Section 3(1)(β)(ii)): Where a Cyprus company receives a dividend directly from another Cyprus company paid from 2024 or 2025 profits, 17% SDC applies within specific year windows:

• Dividends received in 2026 paid from 2024 profits → 17% SDC
• Dividends received in 2026 or 2027 paid from 2025 profits → 17% SDC

In both exceptions, the dividend base is reduced by any amounts previously deemed distributed (under old DDD or new transitional rules), and dividends sourced from income already subject to SDC are exempt from double-charging. Neither exception applies where the dividend ultimately corresponds to a non-Cyprus tax resident individual or a Cyprus tax resident non-domiciled individual.

Dividend Exemption — Income Tax

Dividend income received by a Cyprus company is EXEMPT from Corporate Income Tax under Section 8(20) of the Income Tax Law. This exemption is a cornerstone of Cyprus’s holding company regime and applies regardless of the source (Cyprus or foreign dividends), making Cyprus attractive for dividend flow-through structures.

The scope of the exemption is subject to important limitations:

• Anti-Hybrid Rule: The exemption does not apply to dividends that are deductible expenses in the paying company’s jurisdiction, preventing the exploitation of hybrid mismatches.
• Subject to SDC: While exempt from Corporate Income Tax, dividend income may still be subject to Special Defence Contribution depending on the source and circumstances.

Dividend Income – Foreign Companies (Non-Exempt Dividends)

Dividend income received by a Cyprus tax resident company from a non-Cyprus tax resident company is generally exempt from SDC. This exemption does not apply (and SDC becomes due) 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 7.5% on the profits distributed).

When the exemption does not apply, dividend income is subject to SDC at ↓ Decrease 5% (reduced from 17%).

Interest Income

✓ Abolished Companies are now EXEMPT from SDC on interest income. Interest earned by companies is subject only to Corporate Income Tax at the rate of 15%. This represents a major change that benefits treasury functions and holding company activities within Cyprus.

Active interest (interest on loans granted in the ordinary course of business) remains subject to Corporate Income Tax. The distinction between passive and active interest for SDC purposes is no longer relevant for companies.

Rental Income

✓ Abolished Rental income is now EXEMPT from SDC and is subject only to Corporate Income Tax at 15%. Companies earning rental income will benefit from the standard CIT treatment without the additional SDC burden previously applied.

Deemed Dividend Distribution (DDD) – ABOLISHED

✓ Abolished The Deemed Dividend Distribution rule has been ABOLISHED for 2026 profits onwards. Cyprus companies will no longer be required to deem distributions of 70% of after-tax profits two years from year-end, eliminating a significant compliance burden and SDC exposure.

Dividend Certificates

✦ New from 2026 Companies distributing dividends must now issue dividend certificates specifying:

• The amount of dividend distributed
• The amount of SDC withheld
• The fiscal year of the profits from which the dividend is distributed

These certificates are essential for shareholders to establish the fiscal year of origin for dividend income and to determine applicable SDC rates, particularly where transitional rules apply to pre-2026 profits.

Certificate Content Requirements: Each dividend certificate must include, at a minimum:

• Full name and TIC of the distributing company
• Full name and TIC of each shareholder receiving the dividend
• The gross amount of dividend distributed per shareholder
• The amount of SDC withheld (distinguishing between 5% for 2026+ profits and 17% for pre-2026 profits)
• The fiscal year(s) of the profits from which the dividend originates
• Whether the dividend includes any amounts classified as disguised dividends (and the 10% rate applied)
• The date of distribution

Timing: Certificates must be issued to shareholders at the time of distribution or within 30 days thereafter. The distributing company must retain copies for the 6-year document retention period.

Disguised Dividends

✦ New from 2026 The concept of “disguised dividends” has been introduced with a 10% withholding tax applied where Cyprus tax resident domiciled individuals derive benefits from company assets through private use or asset disposals at undervalue. This anti-avoidance rule prevents shareholders from extracting value without formal dividend distribution.

Private use of company assets includes:

• Personal use of company vehicles, yachts, or aircraft
• Living in company-owned residential property
• Use of company equipment, electronics, or other assets for personal purposes

When private use is involved, the disguised dividend equals the market value of the asset multiplied by the percentage of private use.

Asset disposal at undervalue includes:

• Sale of company property to a shareholder at below market value
• Transfer of company investments to a shareholder at a discount

When assets are disposed at undervalue, the disguised dividend equals the market value minus the consideration actually paid.

Expanded Dividend Definition (from 2031)

✦ New from 2031 From 1 January 2031, the definition of “dividend” for SDC purposes is expanded to include:

• Capital reductions (amounts exceeding paid-in equity)
• Amounts received upon dissolution or liquidation of a company (exceeding paid-in equity)
• Redemption of units or shares in collective investment schemes

This expanded definition closes loopholes where shareholders could extract company value through capital reductions or liquidations without triggering SDC. The expansion is part of Cyprus’s ongoing efforts to align its tax framework with international anti-avoidance standards and to ensure comprehensive coverage of value distribution mechanisms.

Withholding Tax on Dividend Payments to Non-Residents

When a Cyprus company distributes dividends to non-residents, the following withholding tax rules apply:

• Low-Tax Jurisdictions: ↓ Decrease Reduced from 17% to 5%
• Blacklisted Jurisdictions: Remains at 17%
• Other Jurisdictions: Generally no WHT unless specific treaty provisions apply

SDC on Dividends to LTJ & BLJ Related Entities ✦ New from 2026

Under Article 3(δ) of the SDC Law, SDC applies on dividends paid by a Cyprus tax resident company to a related non-resident entity in a low-tax or non-cooperative jurisdiction. Related means the recipient participates directly or indirectly (alone or together with associated persons) in the Cyprus paying company at more than 50% of voting rights, capital, or profit entitlement — or vice versa, or both are commonly controlled at the same threshold. The applicable SDC rates are:

• Low-Tax Jurisdictions (LTJ): ↓ Decrease SDC at 5% (reduced from 17%)
• Non-Cooperative Jurisdictions (BLJ): SDC at 17%
• Permanent establishments of non-Cyprus residents in LTJ or BLJ jurisdictions: same rates apply as above

Where a jurisdiction appears on both the BLJ and LTJ lists simultaneously, the BLJ rate of 17% prevails. The above does NOT apply to dividends paid to a company listed on a recognized stock exchange.

SDC on Interest Payments to Non-Cooperative Jurisdictions ✦ New from 2026

Under Article 3(2)(b1) of the SDC Law, SDC at 17% applies on interest paid or credited from sources within Cyprus to:

• Entities incorporated/registered in non-cooperative jurisdictions (BLJ) and/or entities not tax resident in another non-blacklisted jurisdiction
• A permanent establishment (of a non-Cyprus resident) in a non-cooperative jurisdiction

The above does NOT apply to interest accrued/paid to a company listed on a recognized stock exchange.

Documentation Requirements — Payments to LTJ & BLJ Associated Entities ✦ New from 2026

Decrees issued on 13 March 2026 introduced mandatory substance documentation obligations for Cyprus companies making dividend, interest, or royalty payments to associated entities in low-tax or EU blacklisted jurisdictions, where no WHT is withheld and a tax deduction has been claimed. The documentation must be maintained throughout the statute of limitations period.

Substance Test — 5 of 6 Conditions: The recipient entity must satisfy at least five of the following six conditions:

• Qualified decision-makers are present and actively working in the recipient’s jurisdiction
• At least one board member resides in the recipient’s jurisdiction
• Dedicated office space is available in the recipient’s jurisdiction
• Board meetings are held primarily in the recipient’s jurisdiction
• Operational expenses are proportional to the recipient’s activities
• The beneficial ownership structure avoids pass-through arrangements

Exceptions — Documentation Not Required Where:

• Payments relate to listed securities and the payer reasonably has no knowledge of an indirect connection to a low-tax jurisdiction
• The recipient maintains a permanent establishment elsewhere and is tax resident in a non-blacklisted jurisdiction meeting specified criteria
• The recipient is a Cyprus tax resident, an EU/EEA resident, or is subject to the 15% global minimum tax under Pillar Two rules

Penalties for Late or Non-Submission of Documentation:

Company Dissolution

✦ New from 2026 Upon company dissolution, the cumulative profits of the last five years prior to dissolution that have not been distributed or deemed distributed are considered as distributed. These amounts are subject to SDC at transitional rates:

• Pre-2026 profits: 17% SDC (transitional)
• 2026+ profits: 5% SDC (to the extent ultimate shareholders are Cyprus resident individuals)

This provision does not apply in the case of dissolution under a Reorganisation where the ultimate shareholders remain the same.

Capital Reduction

In the case of a capital reduction of a company, any amounts paid or due to individual shareholders in excess of the previously paid-in equity are treated as dividends. These are subject to SDC at 5% (for 2026+ profits) or 17% (for pre-2026 profits under transitional rules) after deducting amounts previously deemed as distributable. Share redemptions and unit redemptions in collective investment schemes are outside the scope of these provisions.

Compliance and Payment of SDC

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 is payable in 6-month 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.

Criminal Offenses & Enforcement ✦ New from 2026

The 2026 reform introduces criminal offenses for SDC non-compliance. These provisions create personal liability for company officers and directors, going beyond administrative penalties.

Personal Liability of Officers: Where an offense is committed by a company, every director, manager, secretary, or similar officer who consented to or connived in the offense, or was negligent, is jointly and severally liable. This liability extends to former officers for offenses committed during their tenure, even if they have since resigned.

SDCL GAAR — General Anti-Avoidance Rule ✦ New from 2026

The SDC Law now includes its own General Anti-Avoidance Rule (GAAR), operating in parallel to the GAAR under the Income Tax Law. The SDCL GAAR applies where an arrangement (or series of arrangements) has as its main purpose — or one of its main purposes — the avoidance of SDC. Where invoked, the Commissioner may:

• Disregard the arrangement and assess SDC as if it had not been entered into
• Re-characterize the transaction to reflect its economic substance
• Impute SDC liability on the actual beneficiary of the arrangement

This is particularly relevant for arrangements involving the routing of dividends through intermediate entities to avoid the 5% SDC rate or to exploit the non-dom exemption. Companies and shareholders should ensure that group structures and dividend payment chains have genuine economic substance beyond SDC avoidance.