Special Defense Contribution

Individuals

Individuals who are Cyprus tax resident and also Cyprus domiciled are liable to special defense contribution (SDC) on interest, dividends and rental income.

Dividends: SDC of 17% is payable on dividends received from both Cyprus tax resident companies and from non-resident companies.

Interest income: SDC of 30% is payable on interest income from whatever source.  Interest earned from the below listed sources are subject to a reduced rate of 3%:

  • Cyprus Government saving bonds

  • Cyprus Government development stocks

  • Approved provident funds

  • Social Insurance fund

  • Interest earned by individuals whose total income including interest does not exceed €12.000

  • Standard rate – 19%

  • Reduced rate – 9%

  • Reduced rate – 5%

  • Zero rate – 0%

SDC due on interest and dividends received gross is payable at the end of the month following the month in which they were received.

Rental income: Every person who is Cyprus tax resident and domiciled is subject to SDC on rental income at a rate of 3% on the amount of the gross rents reduced by 25%, irrespective of whether the property is situated in Cyprus or abroad.

Where the rents arise from sources outside Cyprus, any foreign tax paid on such rents is deductible for both income tax and/or SDC on rents.

Legal entities

Cyprus tax resident entities are subject to SDC on dividends, interest income and rental income.

Dividends:

  • Dividends paid by one Cyprus tax resident company to another are not subject to SDC.

  • Dividends received by a Cyprus tax resident company from a non-resident company are exempt from SDC provided that the non-resident company engages directly or indirectly by less than 50% in activities which lead to investment income, and the foreign tax burden on the dividends paid by the earning company is not substantially lower than the Cyprus tax burden (i.e. at least 6.25%).

Dividends not within the above exemptions are subject to SDC at a rate of 17%.

Deemed dividend distribution:

Cyprus tax resident companies are deemed to have distributed to their resident shareholders 70% of their profits, after taxes, as at the end of two years from the end of the year to which the profits relate to.  Any actual dividends paid out of such profits reduce the profits subject to deemed distribution rules.  Such deemed profits are subject to SDC of 17%.

Interest income: SDC of 30% is payable on interest income.  Income derived from the ordinary carrying on of a business (such as banking, financing, hire purchase, leasing etc.) is not treated as interest subject to SDC, but instead as business profit subject to income tax.  The same applies for interest earned from group financing activities, interest on current bank account, trade debtors and collective investment schemes.

Rental income: Every person who is Cyprus tax resident and domiciled is subject to SDC on rental income at a rate of 3% on the amount of the gross rents reduced by 25%, irrespective of whether the property is situated in Cyprus or abroad.

Where the rents arise from sources outside Cyprus, any foreign tax paid on such rents is deductible for both income tax and/or SDC on rents.