Introduction of Disguised Dividend Rules

The Cyprus tax reform introduces new rules relating to “disguised dividends” received by individual shareholders.

Under the revised framework, Cyprus tax resident individuals may become subject to Cyprus Special Defence Contribution (“SDC”) where economic benefits are received from Cyprus tax resident companies outside ordinary dividend distributions.

The rules apply to:

• direct shareholders, and
• indirect shareholders

who are natural persons.

The amendments therefore broaden the Cyprus SDC framework beyond formal dividend payments and focus increasingly on the economic benefit received by shareholders.

Applicable Tax Rate

Under the revised framework, disguised dividends received by individuals become subject to Cyprus SDC at:

• 10%.

The 10% rate is effectively double the standard 5% SDC rate applicable to ordinary dividends from 1 January 2026.

The increased rate demonstrates the intention of the legislation to discourage:

• private use of company assets,
• indirect economic distributions, and
• transfers of value to shareholders outside ordinary dividend mechanisms.

Private Use of Company Assets

The disguised dividend provisions apply where:

• a shareholder, or
• an individual related to the shareholder

uses company assets for private purposes.

The rules therefore remain particularly relevant for:

• family-owned companies,
• private investment structures,
• holding companies, and
• closely held corporate groups.

Calculation of the Disguised Dividend

The amount treated as a disguised dividend is generally determined by reference to:

• the market value of the asset, and
• the percentage of personal use.

Broadly:

• the market value of the asset at the commencement of the personal use is multiplied by the relevant percentage of private use; and
• where the percentage of private use subsequently increases, additional disguised dividend amounts may arise based on the increased percentage.

Where the relevant asset is not connected with the company’s business activities, the percentage of private use is generally treated as:

• 100%.

The legislation also provides that reductions in the percentage of personal use do not result in any refund of Cyprus SDC previously imposed.

Disposal of Assets Below Market Value

The revised framework also applies where company assets are transferred or disposed of to:

• a shareholder, or
• an individual related to the shareholder

for consideration below fair market value.

In such cases, the disguised dividend is generally calculated as:

• the market value of the asset at the date of disposal,
  less
• the consideration actually paid.

The amount treated as disguised dividend may also be reduced by any amount already subjected to Cyprus SDC under the private use provisions.

Persons Related to the Shareholder

The concept of related persons follows the provisions of:

• Article 33 of the Cyprus Income Tax Law (“ITL”).

The provisions therefore extend beyond direct shareholder relationships and may apply to benefits provided to:

• spouses,
• family members, and
• other related persons

within the meaning of the legislation.

Situations Where the Rules Do Not Apply

The disguised dividend provisions generally do not apply:

• where assets were originally donated to the company by the relevant shareholder or related person;
• where the Cyprus Income Tax Law benefit-in-kind provisions already apply; or
• where the relevant distribution arises in the context of:
  • capital reductions,
  • dissolutions, or
  • liquidations.

The interaction between the disguised dividend provisions and other Cyprus tax rules therefore remains particularly important in practice.

No Refunds of SDC

The legislation specifically provides that no refunds of Cyprus SDC imposed under the disguised dividend provisions are available.

Accordingly, once Cyprus SDC has been imposed under the disguised dividend framework, subsequent reductions in private use or changes in circumstances generally do not reverse the original tax charge.

Interaction with Benefit-in-Kind Rules

The legislation also clarifies the interaction between the disguised dividend provisions and the Cyprus Income Tax Law benefit-in-kind rules.

Assets used by shareholders in respect of which Cyprus SDC has already been imposed under the disguised dividend framework are generally excluded from the application of:

• Article 33 of the Cyprus Income Tax Law.

The purpose of the rule is generally to reduce the risk of overlapping taxation under separate Cyprus tax provisions.

Cyprus Non-Dom Individuals

The disguised dividend provisions generally apply to Cyprus tax resident individuals receiving disguised dividends from Cyprus tax resident companies.

However, individuals benefiting from the Cyprus non-dom regime may continue to benefit from exemption from Cyprus SDC, subject to the relevant conditions of the legislation.

The Cyprus domicile framework therefore remains particularly important when assessing the practical application of the disguised dividend rules.

Shareholder Certificates and Reporting Obligations

Companies distributing dividends, including disguised dividends, are required to issue shareholder certificates specifying the dividend amount, any disguised dividend amount, the Cyprus SDC withheld, and the fiscal year from which the underlying profits derive.

Practical Examples

Example 1 – Private Use of Company Asset

A Cyprus shareholder uses a company-owned residential property for personal purposes.

Under the revised framework, the private use of the asset may give rise to a disguised dividend subject to Cyprus SDC at 10%.

Example 2 – Asset Transfer Below Market Value

A Cyprus company transfers a vehicle to a shareholder at a price substantially below market value.

The difference between:

• the market value of the vehicle, and
• the consideration paid

may be treated as a disguised dividend for Cyprus SDC purposes.

Example 3 – Non-Business Asset

A shareholder uses a company-owned asset unrelated to the company’s business activities.

Under the revised rules, the personal use percentage may be treated as 100%, increasing the potential Cyprus SDC exposure.

Practical Impact of the Reform

The disguised dividend provisions represent one of the most significant anti-avoidance measures introduced under the Cyprus SDC reform framework.

The amendments may particularly affect:

• closely held companies,
• family-owned businesses,
• investment holding structures,
• shareholder asset planning, and
• private use of company assets.

Cyprus companies and shareholders may therefore need to review:

• shareholder use of company assets,
• transfers of assets,
• market value documentation,
• related-party arrangements, and
• interaction with benefit-in-kind rules.

The practical importance of proper documentation and commercial justification is expected to increase significantly under the revised framework.

Commentary

The Cyprus disguised dividend rules reflect a broader shift toward substance-based taxation and increased scrutiny of indirect economic benefits received by shareholders.

The revised framework significantly broadens the circumstances in which Cyprus SDC may arise even in the absence of formal dividend declarations.

At the same time, the interaction between:

• disguised dividends,
• benefit-in-kind provisions,
• capital distributions, and
• the expanded dividend concept

is expected to remain highly technical and fact-specific.

The amendments therefore reinforce the importance of careful shareholder planning and proper structuring of company asset arrangements under the new Cyprus tax framework.

Contact Rightax

For further information or professional assistance regarding the Cyprus tax reform, international tax matters or Cyprus corporate structures, please contact the Rightax tax advisory team.

+357 99 108 510

[email protected]

The above information is provided for general guidance only. It does not constitute legal or tax advice. Always consult a qualified professional for advice tailored to your specific circumstances