Special Defence Contribution(SDC) of the Republic (Defence tax)

All Cyprus tax resident companies and individuals who are tax resident and domiciled in Cyprus (note 6 below) are subject to Special contribution for defence. Non-tax residents are exempt from Special contribution for defence.

 

Special contribution for defence is imposed on income earned as is indicated to the below table. 

 

Description

Tax rates

Individuals %

Legal entities % 

Dividend income from Cyprus resident companies

17(1)

Nil(1)

Dividend income from non-Cyprus resident companies

17

Nil(2)

Interest income arising from the ordinary activities or closely related to the ordinary activities of the business

Nil(3)

Nil(3)

Other interest income

30(4)

3(4)

Rental income (reduced by 25%)

3(5)

3(5)

 

Notes

 

1.  Dividends received by a Cyprus tax resident company from other Cyprus tax resident companies are excluded from all taxes, unless they are indirectly declared after the lapse of four years from the end of the year in which the profits were generated, in which case they may be subject to Special contribution for defence at 17%.

 

Dividends which emanate directly or indirectly out of such dividends on which special contribution for defence was previously suffered are exempt.

 

2.    This exemption does not apply if:

 

·          more than 50% of the paying company’s activities result directly or indirectly in investment income and

·         the foreign tax is significantly lower than the tax burden in Cyprus. The tax authorities have clarified through a circular that “significantly lower” means an effective tax rate of less than 6,25% on the profit distributed.

 

When the exemption does not apply, the dividend income is subject to special contribution for defence at the rate of 17%.

 

From 1 January 2016 this section also 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.

 

3.    Such interest income is subject to personal income tax / corporation tax.

 

4.    The Special contribution for defence rate on interest income of 30% is effective for interest received or credited from 29 April 2013 (the previous rate was 15%).

 

Interest income from Cyprus government savings bonds and development bonds and all interest earned by an approved provident fund and Social insurance fund is subject to Special contribution for defence at the rate 3% (instead of 30%).

 

In the case where the total income of an individual (including interest) does not exceed €12.000 in a tax year, then the rate on interest income is reduced to 3% (instead of 30%).

 

5.    Rental income is also subject to personal income tax / corporation tax.

 

6.    An individual is domiciled in  Cyprus  for  the  purposes  of special contribution for defence if he/she has a domicile of origin in Cyprus as per the Wills and Succession Law (with certain exceptions) or if he/she has been a tax resident in Cyprus for at least 17 out of the 20 tax years immediately prior to the tax year of assessment.

 

 Payment due days

 

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

 

For interest and dividends paid to Cyprus tax residents any Special contribution for defence due is withheld at source and is payable at the end of the month following the month in which they were paid.

However, Special contribution for defence due on dividends, interest and rental income from abroad is payable in 6 month intervals on 30 June and 31 December each year.

 

Foreign taxes paid can also be credited against the Special contribution for defence tax liability.


Deemed dividend distribution

 

A company resident in the Republic is deemed to have made a distribution of 70% of its profits after tax in the form of dividends at the end of the two years from the end of the tax year in which the profits relate and must account for 17% defence contribution thereon.

 

If a Cyprus resident company does not distribute a dividend within two years from the end of the tax year then:

 

·          70% of accounting profits (after some adjustments) are deemed to have been distributed.

·         Deemed distribution will be reduced by the amount of any actual dividend paid during the relevant period of the two years from the end of the year of assessment to which the profits relate.

·          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 Cyprus tax resident individuals (a rate of 3% is applicable on deemed dividend distribution of Collective Investment Schemes).

 

Any actual dividend paid after the deemed dividend distribution, then special contribution for defence is imposed only on the additional dividend paid not previously subject to deemed dividend distribution.

 

In order to calculate the amount of the deemed distribution, "profits" mean the accounting profits arrived at using generally acceptable accounting principles, but after the deduction of any transfers to reserves as specified by any law. Any offset of group losses as well as any amounts, including any additional depreciation, which emanate or are the result of revaluation of movable and immovable property are ignored. Additionally, including for tax years 2012,2013 and 2014 if the company has acquired in those years plant, machinery or buildings (excluding private motor vehicles) for business purposes, the cost of these assets will be deductible against the accounting profits.

 

The deemed distribution provisions do not apply to profits which relate to non-resident shareholders.

 

In the case of a person not being resident in the Republic receiving dividends from a company which is resident in the Republic, emanating from profits which at any stage were subject to deemed distribution, the special contribution paid as a result of the deemed distribution which is attributable to such person is refundable.

 

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 up to second degree or his 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 spouse.

 

Company dissolution

In the case of liquidation of a company the aggregate amount of 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 therefore subject to Special Contribution at the normal rate of 17% (3% for Collective Investment Schemes).

 

These provisions do not apply in the case of dissolution under a reorganization.

 

Reduction of capital

 

In the case of a reduction of capital of a company, any amounts paid or due to the shareholders over and above the paid-up share capital 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 above provisions apply only to the extent that the ultimate shareholders (direct or indirect) are Cyprus tax resident individuals.

 

The redemption of units or shares in a Collective Investment Scheme is not subject to the above provisions.

 

Tax credit for foreign tax paid

 

Any tax suffered abroad on income which is subject to special defence contribution will be credited against any defence contribution payable on such income. The credit should not exceed the Cyprus tax. Such tax credit will be given unilaterally under the Cyprus tax law irrespective of the existence of a double taxation treaty.

 

Withholding Taxes


There is no withholding tax over dividend payments made to foreign shareholders.
 
There is no withholding tax over interest payments made to foreign creditors.
 
There is no royalty withholding tax provided that the right, for which the payment is made, is exercised outside Cyprus.