Special Defence Contribution for Individuals

Special Defence Contribution (SDC) is a tax imposed on specific categories of passive income earned by Cyprus tax resident domiciled individuals. Non-resident individuals and resident individuals who are not domiciled in Cyprus benefit from exemptions for SDC purposes. For details on the Non-Dom regime, please visit our dedicated page.

SDC Rates Overview (2026 Onwards)

Dividend Income

Current Rate (2026 Onwards): ↓ Decrease Cyprus tax resident domiciled individuals receiving dividends from Cyprus tax resident companies are subject to SDC at a flat rate of 5% on gross dividends.

Transitional Rules: Dividends received from Cyprus tax resident companies out of profits earned up to 31 December 2025 remain taxed at 17% SDC if the dividend is received on or before 31 December 2031. After this date, all dividends are taxed at the 5% rate.

Deemed Dividend Distribution (DDD) Rules

Current Status: ✓ Abolished DDD rules have been fully abolished for 2026 profits onwards. No deemed distributions apply to profits earned from 1 January 2026 onwards.

Transitional Provisions (2024-2025 Profits): For shareholdings held on or before 31 December 2025, transitional DDD rules apply to profits earned in tax years 2024 and 2025. These profits are deemed distributed at 70% of the profit amount, two years after the end of the respective tax year, and are subject to SDC at 17% on the gross deemed dividend amount.

Disguised Dividends

✦ New from 2026

A new concept of “disguised dividends” applies to Cyprus tax resident domiciled individuals (direct and indirect shareholders). These are transactions where benefits are extracted from a company without formal dividend distributions, and they are taxed at 10% (double the standard 5% dividend rate) on the benefit amount.

Scenario 1 – Private Use of Company Assets: Where a shareholder (or a related individual) uses a company asset for private purposes, the disguised dividend is calculated as the market value of the asset multiplied by the percentage of private use. The benefit is captured at the commencement of private use and when the percentage of private use increases.

Scenario 2 – Asset Disposal Below Fair Market Value: Where a company disposes of an asset to a shareholder (or related individual) at a price below fair market value, the disguised dividend equals the difference between the market value and the consideration paid.

Interest Income

Current Status: Interest income earned by Cyprus tax resident individuals is subject to SDC at 17% on gross amounts and is exempt from personal income tax.

Special Rates: The SDC rate on interest is reduced to 3% in the following cases:

• Interest earned on Cyprus government savings bonds or development bonds;
• Interest earned in a tax year where the individual’s total income (including the interest) does not exceed €12,000. (Technically, 17% is withheld at source; the individual then has the right to claim a refund of the SDC paid in excess of 3%.)

Non-Dom Exemption: Cyprus tax resident individuals who are not domiciled in Cyprus are exempt from SDC on interest income.

Rental Income

Current Status (2026 Onwards): ✓ Abolished Rental income is no longer subject to SDC. It is now only subject to personal income tax or corporation tax (where applicable).

Non-Domiciliary Regime and SDC Exemption

Individuals who are Cyprus tax resident but not domiciled in Cyprus (Non-Doms) benefit from exemption from SDC on all categories of passive income: dividends, disguised dividends, interest, and rental income.

How Non-Dom Status Works

An individual whose domicile of origin is outside Cyprus is automatically treated as non-domiciled for SDC purposes when they become Cyprus tax resident. This means that all dividend, interest, and rental income is exempt from SDC.

The non-dom exemption applies for as long as the individual is not deemed domiciled in Cyprus. An individual becomes “deemed domiciled” in Cyprus when they have been Cyprus tax resident for at least 17 out of the immediately preceding 20 tax years.

Lump-Sum Extension of Non-Dom Status

✦ New from 2026

Once an eligible individual acquires deemed domicile (after 17 out of 20 years of Cyprus residence), they can extend their non-dom SDC exemption by paying a lump sum. This provides a valuable planning opportunity for long-term Cyprus residents whose domicile of origin is outside Cyprus and who are seeking to defer SDC liability.

First Extension: €250,000 for a period of 5 years. The individual retains non-dom status and remains exempt from SDC on dividends, interest, and rental income during this period.

Second Extension: Another €250,000 for a further 5 years. The individual continues to benefit from non-dom SDC exemption for the second consecutive five-year period.

Maximum Extensions: Two extensions are available (total 10 additional years of non-dom SDC exemption, total cost €500,000). The lump sum must be paid before the start of each five-year period.

After Extensions: After the second extension expires (i.e., after approximately 27+ years of Cyprus residence), the individual is treated as Cyprus domiciled for SDC purposes and no further extensions are available. At that point, they become subject to SDC at the applicable rates on all passive income.

Non-Dom Lifecycle Timeline

SDC Anti-Avoidance — Individual Shareholders

The SDC Law includes comprehensive anti-avoidance provisions specifically targeting arrangements designed to circumvent SDC liability. The Commissioner of the Tax Department has the power to look through arrangements and treat transactions as if they had not occurred if the main purpose (or one of the main purposes) was to avoid SDC.

Scope of Anti-Avoidance Rules: The anti-avoidance provisions apply to a broad range of arrangements, including:

• Routing of dividends through non-dom individuals or newly created structures;
• Artificial creation of interest-exempt income structures;
• Conversion of dividend income into other forms of income purportedly subject to lower or no SDC;
• Use of related entities or conduit arrangements without genuine commercial substance;
• Any other transactions or arrangements designed primarily to reduce SDC liability.