Special defence contribution
The Special Contribution for Defense is imposed on income from dividends, income from “passive” interest, and rental income earned by companies that are tax residents of Cyprus and individuals who are both tax residents of Cyprus and Cyprus domiciled (subject to conditions). The following rates apply to the Special Defence Contribution:
1. Special defence contribution rates
Special defence contribution is payable at the following rates:
|Special defence Contribution rates for Individuals||Special Defence Contribution – Cyprus for legal entities|
|Dividend income from Cyprus tax resident companies – as from 1/1/2014||17% (2.1)||0% (2.3)|
|Dividend income from non-Cyprus tax resident companies||17% (2.1)||0% (2.2)|
|Interest income arising from ordinary activities or closely related to the ordinary activities of the business||0% (3.1)||0% (3.1)|
|Interest income (passive interest income) (as of 29/4/2013)||30% (3.2)||30%|
|Resident individual’s interests received from the Cyprus Government savings and developments bonds||3%||NA|
|Interest received by Approved Provident Fund||3%||NA|
|Gross rental income (reduced by 25%)||3%||3%|
2 Cyprus dividend tax
- Special defence contribution (Cyprus dividend tax) is not applicable on dividends payable to non-resident persons of Cyprus. Before 16 July 2015, individuals were subject to special defence contribution (Cyprus dividend tax) if they were tax residents in Cyprus. As of 16 July 2015, individuals are subject to special contribution for defence (Cyprus dividend tax) if they are also Cyprus-domiciled. An individual is Cyprus domiciled if he has a domicile of origin in Cyprus per Wills and Succession Law. Irrespective of the domicile of origin of a person, an individual is a Cyprus domiciled if he has been a tax resident in Cyprus for at least 17 out of the 20 tax years preceding the tax year of assessment
- Dividend Income from non – Cyprus tax resident companies is exempt from special defence contribution (Cyprus dividend tax). The exemption does not apply when:
- the paying company’s activities lead to investment income that exceeds 50% of the total income and
- the foreign tax is significantly lower than the tax in Cyprus. Significantly lower means lower of 6,25%.
- No special defence contribution (Cyprus dividend tax) on dividends received by a Cyprus tax resident company from other Cyprus tax resident companies unless they are declared indirectly after the lapse of four years after the year in which the profits arose, in which case they may be subject to special contribution for the defence (Cyprus dividend tax) at 17%. Dividends emanating directly or indirectly out of such dividends on which Special Defence Contribution (Cyprus dividend tax) was previously suffered are exempt.
3. Interest tax in Cyprus
- Interest earned on the ordinary course of business in Cyprus, including interest closely linked to the ordinary course of business and interest on collective investment schemes, is not considered interest for Special Contribution for Defence purposes and is therefore not subject to Special Contribution for Defence.
- A person whose total annual income, including interest, does not exceed € 12,000 is entitled to a refund of the contribution withheld beyond the 3% rate.
4. Deemed dividend distribution – Deemed dividend tax
As of 2003, the Cyprus resident companies are deemed to have distributed, in the form of dividends, 70% of their accounting profits after deducting the Cyprus corporation tax (Cyprus corporation tax means income tax, capital gains tax, special defence contribution and foreign taxes), from the end of the second year of the year when the profits have been related and accounted special defence contribution. The deemed distribution is reduced by any actual dividends distributed.
Based on the amendment Act of 2012 deemed dividend distribution does not apply with respect to profits for the years 2012, 2013 and 2014 to the extent that the company acquires plants, machinery and buildings. For deemed dividend distribution, it is not allowable any cost of acquisition of property, plant and equipment after 1/1/2015.
When an actual dividend was paid after the deemed distribution, then a special defence contribution (Cyprus dividend tax) is imposed on the dividend paid over and above the dividend previously deemed to have been distributed.
Any losses brought forward, group relief losses as well as any amounts which emanate from the revaluation of movable and immovable property, including any additional depreciation, are ignored.
The deemed distribution provisions do not apply to profits arising either from a loan restructuring, subject to conditions, or a reorganisation. In addition, the deemed distribution (Cyprus deemed dividend tax) provisions do not apply to accounting profits arising in the years 2017 to 2020 which result from the write-off of part or of the whole amount of a loan that was a non-performing loan on or before 31 December 2015.
Deemed distribution provisions do not apply to the profits of a company owned directly or indirectly by non-tax residents of Cyprus or residents who do not have their domicile in Cyprus.
5. Reduction of the capital of a Cyprus company
In the case of a reduction of capital of a Cyprus company, amounts paid or due to shareholders exceeding the paid-up share capital will be considered as dividends distributed by the Cyprus company and will be subject to special defence contribution (Cyprus dividend tax) provided that the shareholders are Cyprus tax residents and domiciled individuals.
The redemption of units or other ownership interests in an open-ended or closed-ended collective investment scheme is not considered a capital reduction and is not subject to Special Contribution for Defence (SDC).
6. Cyprus company dissolution
The total of the last five years’ profit preceding the liquidation which has not been distributed by the Cyprus company or deemed to be distributed will be considered as distributed on liquidation and are subject to defence contribution (Cyprus dividend tax).
Cyprus companies that are under voluntary dissolution or liquidation are obliged to submit within one month from the date of the approval of the resolution, a deemed dividend declaration and pay any SDC in relation to the profits of the specific tax year and the two preceding years.
The deemed distribution provisions do not apply to accounting profits arising during the dissolution or liquidation of a company when its assets are insufficient to pay its creditors and no amount can be distributed or paid to its shareholders.
Where assets are distributed to the Cyprus company’s shareholders upon the Cyprus company’s liquidation or dissolution, which have a market value that exceeds the cost of their acquisition by the company, the deemed distribution (deemed dividend tax) provisions will apply.
The amount of the dividend deemed to be distributed to its shareholders will be equal to the difference between the market value of the assets and the cost of acquisition of the particular asset by the company. The deemed dividend distribution of profits that become realised upon the Cyprus company’s dissolution or liquidation may not exceed the amount of the net assets distributed to the shareholders.
The provisions do not apply in the case of dissolution under reorganisation, in accordance with certain prerequisites set out in the relevant regulations, or where the shareholders are not residents or non-domiciled in Cyprus.
7. Disposal of Asset to a shareholder at a price less than market value
When a Cyprus company disposes an asset to an individual shareholder or a relative of his or his spouse at a price less than its market value, the difference between the consideration and the market value will be deemed to have been distributed to the shareholder. This provision doesn’t apply to assets originally gifted to the company by an individual shareholder or a relative of his up to second degree or his spouse.
8. Loan restructuring
To give motives for loan restructuring, tax incentives have been provided, in those cases where such a restructuring includes the transfer of immovable property to the lender against the loan obligation (Subject to conditions).
If a part of the sale proceeds, will return to the borrower, then this amount is subject to IT, CGT and SDC, which must be withheld and paid to the authorities by the loan provider. The cost of acquisition is the amount that had been agreed upon for restructuring.
9. Cyprus company tax credit for foreign tax paid
Foreign tax paid on income subject to Special Defence Contribution (Cyprus dividend tax) may be credited against Special Defence Contribution (Cyprus dividend tax) payable on such income irrespective of the existence of a tax treaty.
10. Refund of deemed distribution in the case of a person who is not domiciled in Cyprus
In the case of a person, not resident in Cyprus receiving dividends from a Cyprus company paid out of profits which at any stage were subject to deemed distribution, the amount paid for deemed distribution is refunded.
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