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

All Tax residents of the Republic are subject to SDC imposed on income earned as is indicated to the below table. Non-tax residents are exempt from SDC.
 
 
Description
 
Tax rates
 
Individuals %
Legal entities %
 
Notes
 
Dividend income from Cyprus resident companies
20
Nil
 
Dividend income from non-Cyprus resident companies
15
Nil
1
Interest income arising from the ordinary activities or closely related to the ordinary activities of the business
Nil
Nil
 
Interest earned by an approved provident fund
3
3
2
Rental income (reduced by 25%)
3
3
 
Profits earned by public corporate bodies
3
3
2
 
Notes
 
1. Dividends received from an overseas company is exempt from defence fund contribution.
 
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 save clarified through a circular that “significantly lower” means a tax burden rate below 5%.
 
When the exemption does not apply, the dividend income is subject to special contribution for defence at the rate of 20%.
 
2. Interest income from Cyprus government savings bonds and development bonds and all interest earned by a provident fund are subject to special contribution for defence at the rate 3% (instead of 10%).
 
In the case where the total income of an individual (including interest) does not exceed €12.000 in a tax year, then the rate is reduced to 3%.
 
Payment due days
 
Special contribution for defence on rental income is payable in a 6 months interval on 30 June and 31 December each year.
 
In the case where the tenant is a company, partnership, state or local government department SDC on rental income is withheld at source. In all the other cases the SDC is payable by the landlord in monthly intervals on 30th of June and 31st of December each year.
 
Interestand dividends received gross any defence due is payable at the end of the month following the month in which they were received.
 
With effect from June 2011, SDC on dividends and interest income from abroad is payable in 6 month intervals on 30th of June and 31st of December each year.
 
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 20% defense contribution thereon from the 1st of January 2012 until 31st of December 2013.

 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 (net of corporation tax, SDC, capital gains tax, foreign taxes and after some other adjustments) are deemed to have been distributed.
  • 20% special contribution for defence is imposed on deemed dividend distribution applicable to shareholders who are residents of Cyprus from ths 1st of January 2012 until 31st of December 2013 (3% on deemed dividend distribution of Collective Investment Schemes).
  • 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.
 
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.
 
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.
 
With effect from June 2011 when a company sells assets to an individual shareholder or a relative up to second degree or spouse thereof 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 doesn’t apply for assets originally gifted to the company by the shareholder.
 
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 20%  (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 up to the amount of the undistributed taxable income of any tax year calculated before the deduction of losses from prior years, will be considered as dividends distributed subject to special defence contribution at the rate of 15% after deducting any amounts which have been deemed as distributable profits.
 
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.