Special Contribution For Defence

Special contribution for defence is imposed on income earned by Cyprus tax residents. Non-tax residents are exempt from special contribution for defence. It is charged at the rates shown in the table below:

  Tax rates
  Individuals
Legal entities
  % %
Dividend income from Cyprus resident companies 17 nil
Dividend income from non-Cyprus resident companies 15 nil1
Interest income arising from the ordinary activities or closely related to the
ordinary activities of the business
nil nil
Other interest income 152 152
Rental income (reduced by 25%) 3 3


Notes
1. Dividend income from abroad is exempt from defence fund contribution.
This exemption does not apply if:

  • more than 50% of the paying company’s activities result directly or indirectly in investment income and
  • The foreign tax is significantly lower than the tax burden in Cyprus. The tax authorities have clarified through a circular that “significantly lower” means a tax burden rate below 5%.

When the exemption does not apply, the dividend income is subject to special contribution for defence at the rate of 17%.

2. Interest income from Cyprus government savings bonds and development bonds and all interest earned by a provident fund is subject to special contribution for defence 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%.

When the tenant is a company, partnership, the state or local government Special contribution for defence on rental income is withheld at source. In all other cases the special contribution for the defence on rental income is payable by the landlord in 6 monthly intervals on 30 June and 31 December each year.

For interest and dividends received gross any defence due is payable at the end of the month following the month in which they were received.

However, with effect from June 2011, special contribution for defence on dividends from abroad and interest income from abroad is payable in 6 month intervals on 30 June and 31 December each year.

Foreign taxes paid can also be credited against the defence tax liability.
 
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, special defence contribution, capital gains tax and foreign taxes and after some adjustments) are deemed to have been distributed.
  • 17% special contribution for defence 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 two years from the profits of the relevant year.

When an actual dividend is paid after the deemed dividend distribution, then special contribution for defence is imposed only on the dividend paid over and above the dividend that was previously deemed to had been distributed.

In case of two tier structures of Cyprus companies (parent with subsidiary) owned by non-resident shareholders, defence contribution paid by the subsidiary on deemed distribution is refundable to the non-resident shareholder upon receipt of an actual dividend.
 
Disposal of assets to shareholder at less than market value
 
When a company sells assets to an individual shareholder or a relative up to second degree or spouse thereof for a consideration less than its market value, the difference between the consideration and the market value will be deemed to have been distributed as a dividend to the shareholder. This provision, which will come into effect in June 2011, does not apply for assets originally gifted to the company by the shareholder.
 
Company dissolution
 
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, will be considered as distributed on dissolution and will be subject to special contribution for defence at the rate of 17% (3% for Collective Investment Schemes).

This provision does not apply in the case of dissolution under a Reorganisation.
 
Reduction of capital
 
In the case of a reduction of capital of a company, any amounts paid or due to the shareholders over and above the paid up share capital will be considered as dividends distributed subject to special defence contribution at the rate of 17% after deducting any amounts which have been deemed as distributable profits.

The above provisions do not apply where the shareholders are non-residents in Cyprus.