Foreign Dividends Received by Cyprus Companies

The Cyprus tax reform maintains the long-standing participation exemption applicable to foreign dividend income received by:

• Cyprus tax resident companies, and
• Cyprus permanent establishments of foreign companies.

Under the revised framework, foreign dividends generally continue to remain exempt from Cyprus Special Defence Contribution (“SDC”), unless the specific exemption conditions are not satisfied.

The reform nevertheless introduces an important amendment where the exemption does not apply, reducing the applicable SDC rate from:

• 17% to
• 5%.

The amendment represents a significant change for Cyprus holding and investment structures receiving foreign dividend income.

Cyprus Participation Exemption Regime

Cyprus has historically maintained an attractive participation exemption regime for foreign dividends received by Cyprus tax resident companies.

Under the general framework, foreign dividend income received from non-Cyprus tax resident companies is exempt from SDC unless specific anti-avoidance conditions apply.

The exemption remains one of the key features of the Cyprus holding company regime and continues to be particularly relevant for:

• international holding structures,
• investment groups,
• family office structures, and
• multinational corporate groups.

When the Exemption Does Not Apply

The foreign dividend exemption may not apply where both of the following conditions are satisfied:

• more than 50% of the activities of the paying company result directly or indirectly in investment income; and
• the foreign tax burden on the income of the paying company is substantially lower than the corresponding tax burden in Cyprus.

Both conditions generally need to be satisfied simultaneously for the exemption to be denied.

The rules therefore primarily target passive investment structures located in low-tax jurisdictions.

Reduction of the SDC Rate from 17% to 5%

Prior to the reform, where the foreign dividend exemption did not apply, the gross dividend received by the Cyprus company could become subject to SDC at the rate of 17%.

Under the revised framework, the applicable SDC rate is reduced to 5%.

The amendment therefore significantly reduces the tax burden in situations where:

• the participation exemption conditions are not satisfied, or
• the foreign dividend falls outside the exemption regime.

Interaction with Low-Tax Jurisdictions

The revised framework remains particularly relevant for foreign dividends received from:

• low-tax jurisdictions,
• investment holding companies, and
• passive investment structures.

The concept of low taxation continues to play an important role when assessing whether the participation exemption applies.

Following the increase of the Cyprus corporate tax rate to 15%, the comparison between the foreign tax burden and the Cyprus tax burden becomes increasingly relevant in practice.

Practical Impact of the Reform

The reduction of the SDC rate from 17% to 5% represents an important development for Cyprus holding company structures receiving foreign dividend income.

The amendment may reduce the effective tax exposure in structures involving:

• passive investment income,
• low-tax jurisdictions,
• investment holding arrangements, and
• foreign participation structures that do not fully satisfy the exemption conditions.

The reform therefore strengthens the competitiveness of the Cyprus holding company regime while maintaining the broader anti-avoidance framework applicable to passive low-tax structures.

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