All residents of the Republic are subject to Special Defence Contribution (SDC) on the sources of income indicated below. Non residents are not subject to SDC.
The following types of income are subject to SDC:
1. Dividend income
- Dividends paid by a company resident in the Republic to another company resident in the Republic are exempt from SDC. 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 20% SDC. dividends which emanate directly orindirectly out of such Dividends on which SDC was previously suffered are exempt.
- dividends received by a company resident in the Republic from a non resident company (under certain criteria)
2. Interest income
- Currently, the SDC rate on interest is 15%. This has increased to 30% and the new rate is effective as of the date of the publication of the relevant law in the official Gazette of the Republic of Cyprus.
- 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, is not considered interest for SDC purposes.
- Interest income from Cyprus government savings bonds and development bonds and all interest earned by a provident fund is subject to SDC at the rate 3% (instead of 15%).
- in the case where the total income of an individual (including interest) does not exceed €12.000 in a tax year, then the rate is reduced to 3%.
3. Rental income
The gross amount of the rental income earned, after a 25% deduction, is subject to SDC at the rate of 3%. Rental income is also subject to personal income tax/corporation tax.
Deemed dividend distribution
If a Cyprus resident company does not distribute a dividend within two years from the end of the tax year then:
- 70% of accounting profits (net of corporation tax, SDC, capital gains tax and foreign taxes and after some adjustments) are deemed to have been distributed
- 20% SDC is imposed on deemed dividend distribution applicable to shareholders who are residents of Cyprus (3% on deemed dividend distribution of Collective Investment Schemes)
- Deemed distribution is reduced with payments of actual dividends which have already been paid during the relevant year or paid during the two following years from the profits of the relevant year
When an actual dividend is paid after the deemed dividend distribution, then SDC is imposed only on the dividend paid over and above the dividend that was previously deemed to had been distributed.
This SDC is paid by the Company for the account of the shareholders.
Allowance for foreign tax
In case that foreign tax was paid on income subject to SDC, this can be given as an allowance against the SDC payable on the income, irrespective of the existence of a double taxation relief with the foreign country.
Payment of SDC liability
For interest and dividends paid to Cyprus tax residents any SDC due is withheld at source and is payable at the end of the month following the month in which they were paid.
However, SDC on dividends, interest and rental income from abroad is payable in 6 month intervals on 30 June and 31 December each year. SDC on rental income is payable in 6 monthly intervals on 30 June and 31 December each year.
In relation to rental income, when the tenant is a Cyprus company, partnership, the state or local authority SDC on rental income is withheld at source and is payable at the end of the month following the month is which it was withheld. In all other cases the SDC on rental income is payable by the landlord in 6 monthly intervals on 30 June and 31 December each year.