Reduction of SDC on Dividend Income

The Cyprus tax reform introduces a significant reduction in the Special Defence Contribution (SDC) rate on dividend income received by Cyprus tax resident individuals.

As from 1 January 2026, the SDC rate on dividends is reduced from 17% to 5%.

The new rate applies to dividends received by:

• Cyprus tax resident individuals; and
• Cyprus tax resident and domiciled individuals (Cyprus tax resident and non-domiciled individuals are exempt) receiving dividends from Cyprus or foreign companies.

The reform therefore substantially reduces the effective taxation of dividend income for Cyprus tax residents who are subject to the Cyprus domicile rules.

Transitional Rules for Pre-2026 Profits

Special transitional provisions apply to dividends distributed out of profits earned up to 31 December 2025.

Under the transitional framework, dividends distributed out of profits generated up to 31 December 2025 remain subject to SDC at the previous rate of 17%, provided the dividend is received on or before 31 December 2031.

Accordingly, companies may need to distinguish between:

• profits generated up to 31 December 2025; and
• profits generated from 1 January 2026 onwards.

This distinction becomes relevant when determining the applicable SDC rate on future dividend distributions.

Cyprus Non-Dom Individuals

The reform does not change the treatment of individuals benefiting from the Cyprus non-domicile (non-dom) regime.

Cyprus tax resident individuals who qualify as non-domiciled persons continue to benefit from an exemption from SDC on dividend income, subject to the conditions of the legislation.

As a result:

• Cyprus domiciled individuals may now be taxed at 5%; while
• Cyprus non-dom individuals may continue to receive qualifying dividends free from SDC.

Anti-Avoidance Provision

The legislation also revises the anti-abuse provision relating to intermediary holding structures.

The revised rule applies in situations where companies are interposed primarily to receive dividends on behalf of individuals without substantial commercial or economic substance. The provision now extends to both direct and indirect participations exceeding 50% of:

• share capital;
• profit rights; or
• voting rights.

The purpose of the provision is to prevent the use of artificial arrangements designed mainly to avoid SDC on dividend income.

Practical Impact of the Reform

The reduction of the dividend SDC rate represents one of the most important amendments introduced under the Cyprus tax reform package.

The new 5% rate lowers the tax burden on dividend income for Cyprus domiciled individuals and may improve the overall attractiveness of Cyprus as a holding and investment jurisdiction.

Companies with accumulated profits from previous years may need to distinguish between pre-2026 and post-2025 profits when paying dividends.

Companies may therefore need to monitor:

• the origin of distributable profits;
• historical reserves;
• prior deemed dividend distributions; and
• the timing of future dividend payments.

Commentary

The amendment significantly changes the taxation of dividend income in Cyprus by reducing the SDC rate to 5%, while preserving the non-dom framework that has formed part of the Cyprus tax system for several years.

Although the reduction is expected to simplify the effective taxation of dividend income going forward, the transitional provisions applicable until 2031 may require careful tracking of historical profits and prior distributions.

The reform nevertheless represents a substantial shift in the Cyprus dividend taxation framework and further strengthens the competitiveness of Cyprus as an international business and investment location.

Contact Rightax Cyprus

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