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Defence Fund Contributions

Special contribution for the defence fund

Special Contribution for Defence

Special Contribution to the Defence Fund is imposed on income received or deemed to have been received by any person who resides in Cyprus. In the case of individuals, an exemption is granted if such individuals are not domiciled in Cyprus. The rates for Defence Fund apply as per the below table.

Persons that are subject to Special Contribution for Defence:

  • Cyprus tax resident companies
  • Individuals who are tax residents and domiciled in Cyprus

Rates applied for Defence Fund

Income Rate
Dividend Income
Interest Income
Interest received by an individual from Government Savings Certificates, Government Bonds and Corporate Bonds
Interest earned by an approved provident fund
Interest earned by the Social Insurance Fund
Rental Income less 25%


Dividend income exempted from SDC:

  • Dividends received by a company resident in the Republic from another company resident in the Republic, excluding dividends paid indirectly after the lapse of 4 years from the end of the year in which the profits which were distributed as dividends were generated
  • Dividends are received directly or indirectly from dividends that SDC has already paid.
  • Dividends received by a company resident in the Republic or a company not resident in the Republic which maintains a permanent establishment in the Republic from a company which is not resident in the Republic.

The exemption does not apply if:

a)More than 50% of the activities of the non-resident dividend-paying company lead to investment income; and

b) 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 with a permanent establishment in the Republic.

Interest income

Interest earned as a result of the ordinary carrying on of the business (including interest closely connected to the ordinary carrying on of the company) and interest acquired by a collective investment scheme is not considered interest for SDC purposes and is therefore exempt from SDC.

An individual whose total annual income, including interest, does not exceed €12.000, who received interest which has been subject to SDC, has the right to a refund of the amount of SDC suffered in excess of 3%.

Deemed distribution

A company resident in the Republic is deemed to have distributed 70% of its profits after taxation in the form of dividends at the end of the two years from the end of the tax year in which such profits were generated. SDC is imposed to the extent that the company’s ultimate direct/indirect shareholders are Cyprus tax residents and domiciled individuals.

To calculate the amount of the deemed distribution, the term «profits» means the accounting profits arrived at using generally accepted accounting principles, 23 after the deduction of any transfers to reserves as specified by any law. Any losses brought forward, group relief losses, and any amounts emanating from the revaluation of movable and immovable property, including any additional depreciation, are ignored.

The term «taxation» includes the following taxes:

  • Corporate income tax (which includes charges of additional tax);
  • SDC;
  • Capital gains tax; and
  • Foreign tax paid that has not been credited against income tax and/or SDC payable for the relevant year.

The amount of deemed dividend is reduced by the actual dividend distributed during the year the profits were generated or the following two years.

If an actual dividend is paid after the deemed dividend distribution date, any deemed distribution reduces the actual dividend on which the SDC is payable.

In the case of an individual who is not resident or non-domiciled in the Republic receiving dividends from a company which is resident in the Republic, emanating from profits which at any stage were subject to deemed distribution, the SDC paid as a result of the deemed distribution which is attributable to such person is refundable.

The deemed distribution provisions do not apply to profits arising from a loan restructuring, subject to conditions, or a reorganisation.

Disposal of assets to shareholders at less than market value

In the case where a company disposed an asset to its Cyprus tax resident and domiciled shareholder (individual) or to his/her relative of up to the second degree of kindred or his/ her spouse, without consideration or for a consideration which is less than the market value of the asset disposed of, it is deemed that the company has distributed dividends to its shareholder, equal to the difference between the market value of the asset and the amount of the consideration.

The above provision will not apply if the company initially received the asset by way of a gift from its shareholder (individual) or his/her relative up to the second degree of kindred or from his/her spouse.

Reduction of capital

In the case of a company’s capital reduction, any amounts paid or due to shareholders that are individuals, more than the amount of the share capital that the shareholder actually paid, will be treated as a deemed dividend subject to SDC, provided that the shareholders are Cyprus tax resident and domiciled individuals.

The buyback or redemption of units or other ownership interests in an opened-ended or closed-ended collective investment scheme is not considered a capital reduction and is not subject to SDC.

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