Abolition of SDC on Corporate Interest Income

The Cyprus tax reform abolishes the application of Special Defence Contribution (SDC) on interest income received by Cyprus tax resident companies.

The amendment applies from 1 January 2026 and represents a significant simplification of the Cyprus taxation framework applicable to corporate interest income.

Under the revised framework, qualifying interest income received by Cyprus companies will generally no longer be subject to SDC.

Previous Tax Treatment of Interest Income

Prior to the reform, certain categories of interest income received by Cyprus companies could fall within the scope of SDC.

The previous framework often required a distinction between:

• active interest income,
• passive interest income,
• financing activities, and
• ordinary business operations.

This created practical complexity for:

• holding companies,
• treasury companies,
• financing structures, and
• investment groups.

Tax Treatment from 1 January 2026

From 1 January 2026, interest income received by Cyprus tax resident companies will generally no longer be subject to SDC.

Instead, such income will generally fall within the ordinary Corporate Tax framework.

The amendment therefore simplifies the taxation of corporate interest income and reduces the previous overlap between Corporate Tax and SDC.

Distinction Between Companies and Individuals

The reform primarily affects Cyprus tax resident companies.

The amendment should be distinguished from the taxation of passive interest income received by Cyprus tax resident individuals, which generally continues to fall within the SDC framework.

Accordingly:

• corporate interest income is generally removed from SDC; while
• passive interest income of individuals generally remains subject to SDC.

Practical Impact on Cyprus Structures

The abolition of SDC on corporate interest income is expected to be particularly relevant for:

• financing companies,
• treasury structures,
• investment holding companies,
• group financing arrangements, and
• international corporate structures using Cyprus entities.

The amendment simplifies the Cyprus tax treatment of financing income and may improve the efficiency of Cyprus financing structures.

The amendment may also be relevant for Cyprus investment funds and asset-holding structures that operate through Cyprus tax resident companies. Where the relevant fund vehicle is treated as a Cyprus tax resident company, interest income should generally fall within the Corporate Income Tax framework and outside the SDC regime from 1 January 2026.

Practical Effect of the Reform

The amendment removes one of the more technical aspects of the Cyprus SDC framework for companies.

The reform is expected to:

• simplify tax compliance,
• reduce uncertainty regarding interest classification, and
• streamline the taxation of corporate financing income.

The amendment may therefore further strengthen the position of Cyprus as an international financing and holding jurisdiction.

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