SPECIAL CONTRIBUTION FOR DEFENSE
LIABILITY
Special contribution for defense is imposed on dividend income, “passive” interest income and rental income.
Companies are subject to Special Contribution for Defense if they are tax resident in Cyprus.
Individuals are subject to Special Contribution for Defense only if they are both Cyprus tax resident and Cyprus domiciled. (Prior to 16 July 2015 individuals were subject to Special Contribution for Defense if they were tax resident in Cyprus).
RATES
| Individuals | Companies | |
|---|---|---|
| Rental Income minus 25% deduction | 3% | 3% (Note 1) |
| Dividend Income from Cyprus resident companies (Note 4) | 17% | 0 (Note 2) |
| Dividend Income from non- Cyprus resident companies (Note 4) | 17% | 0 (Note 2) |
| Interest Income –passive- (Note 5) | 30% | 30% |
| Interest Income (arising from the ordinary activities or closely related to them) | n/a | n/a |
| Interest Income earned by individuals from Government development bonds and Government saving bonds | 3% | n/a |
| Interest Income earned by individuals when their income does not exceed €12.000 | 3% | n/a |
| Interest Income earned by provident funds | 3% | |
Notes:
- From 1/7/2011 when the tenant (only when then tenant is a company, partnership, the state or local authority) pays rent to Cyprus tax residents must deduct the Special Contribution for Defense and pay to the owner the net amount of rent.
- Dividends declared by a Cyprus tax resident company to another Cyprus tax resident company after the lapse of four years from the end of the year in which the profits were generated are subject to Special Contribution for Defense at the rate of 17%.
- As from 01/01/2016, when dividends received from non – Cyprus resident companies are deductible for tax purposes by the paying company, are subject to Corporation Tax.When this section applies, the exemption from Special Contribution for Defense does not apply if: -more than 50% of the paying company’s activities result in investment income and, – the foreign tax is significantly lower than the tax burden in Cyprus (below 6.5% on the distributed profit).
- From 01/01/2014 the rate is 17%. (From 01/01/2012 till 31/12/2013 the rate was 20%. From 31/08/2011 till 31/12/2011 the rate was 17% and from 01/01/2003 till 30/08/2011 the rate was 15%).
- From 29/04/2013 the rate is 30%. (From 31/08/2011 till 28/04/2013 the rate was 15% and from 01/07/2002 till 30/08/2011 the rate was 10%).
DEEMED DIVIDEND DISTRIBUTION (DDD)
The Deemed Dividend Distribution (DDD) is applicable only when the ultimate direct/indirect shareholders of the company are individuals who are both Cyprus tax resident and Cyprus domiciled. For the same company, DDD might be applicable for some shareholders who are both Cyprus tax resident and Cyprus domiciled and not be applicable for the shareholders who are not Cyprus tax resident or to shareholders who are Cyprus tax resident but not Cyprus domiciled. (Prior to 16 July 2015 individuals were subject to DDD if they were tax resident in Cyprus).
THE PROVISIONS OF DDD
If a Cyprus tax resident company does not distribute dividends that cover 70% of the adjusted for DDD accounting profits within two years from the end of the tax year in which the profits were generated then:
- 70% of adjusted for DDD accounting profits are deemed to have been distributed, and 17% special contribution is imposed to shareholders.
- Any actual dividends paid reduce this liability, and
- No liability will arise from actual dividends that will be paid in the future from these profits.
The provisions of DDD (payment of 17% special contribution) apply also to the following cases:
- Disposal of assets to shareholder at less than the market value: The DDD applies to the difference between the consideration paid and the market value. The provision does not apply for assets originally gifted to the company by the shareholder. (The term shareholder, covers individuals, their spouse and relatives of them up to second degree).
- Company dissolution: The DDD applies to the cumulative profits of the last five years prior to the company’s dissolution, which have not been distributed or deemed to have been distributed. The provision does not apply in the case of dissolution under Reorganisation.
- Reduction of capital. The DDD applies to the amounts paid or due to the shareholders over and above the previously paid-in equity.