Contribution for Defence – Special Contribution for Defence
Special Defence Contribution is an additional tax (to income tax) levied in Cyprus only on certain type of income including interest, dividends, royalties and rents and applied on the basis set out below in accordance with the Special Contribution for the Defence of the Republic Law (Law No. 117(I) of 2002 , as amended)
Rates
All residents of Cyprus are subject to defence contribution on the sources of income indicated below. Non residents are not subject to the defence contribution.
| Dividends | 15% |
| Interest income | 10% |
| Interest received by an individual from Government Savings Certificates | 3% |
| Interest received by an individual from Government Bonds | 3% |
| Interest received by an individual from Government Bonds | 3% |
| Rental income less 25% | 3% |
| Interest earned by the Social Insurance Fund | 3% |
Dividends
Exemptions:
- Dividends received by a company resident in Cyprus from another company resident in the Republic of Cyprus.
- Dividends received by a company resident in Cyprus or a company not resident in the Republic which maintains a permanent establishment in the Republic of Cyprus from a company which is not resident in the Republic
This exemption does not apply if:
i) The non-resident company paying the dividend engages directly or indirectly more than 50% in activities leading to investment income; and
ii) The foreign tax burden on the income of the dividend paying company is substantially lower than the tax burden of the Cyprus tax resident company or the non-resident company which has a permanent establishment in Cyprus.
- Dividends derived directly or indirectly from profits arising from operating a Cyprus flag ship in the course of shipping activities or from the provision of ship management services.
Interest income
Interest that is received as a result of the carrying on of a business activity, including interest closely connected to the ordinary activities of the business, and interest earned by open-ended or closed-ended collective investment schemes, is not considered interest for defence contribution purposes.
A person whose total annual income, including interest, does not exceed €12.000 who receives interest which has been subject to defence contribution at 10%, has the right to a refund of the amount of defence contribution suffered in excess of 3%.
Deemed distribution
A company resident in Cyprus is deemed to have made a distribution of 70% of its profits after tax in the form of dividends at the end of the two years from the end of the tax year in which the profits relate and must account for 15% defence contribution thereon.
A person who is a tax resident of Cyprus, who is deemed to receive dividends from a collective
investment scheme, whose formation and operation is regulated by the Open-ended Collective
Investments in Transferable Securities and Related Matters Law or any other law which regulates the formation and operation in Cyprus of other collective investment schemes, is subject to defence contribution of 3% of the deemed dividend.
In arriving at the amount of the deemed distribution, any actual dividend which is distributed by the end of the two year period from the end of the tax year to which the profits relate is deducted including interim dividends paid during the tax year.
In cases where an actual dividend is paid after the two year period, any deemed distribution reduces the actual dividend on which the defence contribution is withheld.
For the purpose of calculating the amount of the deemed distribution, “profits” mean the accounting profits arrived at using generally acceptable accounting principles, but after the deduction of any transfers to reserves as specified by any law. Any offset of group losses as well as any amounts, including any additional depreciation, which emanate or are the result of revaluation of movable and immovable property are ignored.
The deemed distribution provisions do not apply to profits which relate to non-resident shareholders.
In the case of a person not being resident in Cyprus receiving dividends from a company which is resident in Cyprus , emanating from profits which at any stage were subject to deemed distribution, the defence contribution paid as a result of the deemed distribution which is attributable to such person is refundable.
