SPECIAL DEFENCE CONTRIBUTION

Overview
Special defence contribution (SDC) is a tax on passive income and is imposed on (i) individuals and (ii) companies which are Cyprus Tax Residents. Non Cyprus Tax Residents do not pay Special defence contribution (SDC) with some exemptions.

 

Income from Dividends – Individuals (Cy Tax residents / Non-Cy Tax residents)

  • If you receive dividend income from a Cyprus Company SDC will withheld by the Cyprus Company according to the tax residence status
    • If you are Cyprus Tax Resident at the time of the payment, then 17% withholding tax will be deducted from the gross dividend.
    • If you are a Non-Cyprus Tax Resident at the time of the payment, then no withholding tax will be deducted from the gross dividend (note 1)
  • If you receive dividend income from from abroad, tax or any other withholding amount will withheld by the payer overseas Company according to their tax rules.
    • If you are an individual Cyprus Tax Resident you have a overall tax obligation of 17%. The tax should be paid to the Cyprus Tax Authorities through self-assessment. Any tax paid (withheld) abroad, can  claimed as credit taking into consideration that there is a tax treaty between the Cyprus and the country where the tax was paid /withheld at source. For example, you are allowable to receive from Ukraine gross dividend of €100,000. WHT in Ukraine is 15% therefore, €15,000 was paid or need to paid to the Ukraine Tax Authorities according to the Ukraine tax law. Since there is tax treaty between Cyprus and Ukraine, you should pay in Cyprus through self assessment, the amount of €2,000 (€100,000 * 17% less €15,000). 

 

Income from Dividends – Companies (Cy Tax residents / Non-Cy Tax residents)

  • If you receive  dividend income from a Cyprus Company SDC no tax will be withheld by the payer CY Company independently of whether the recipient company/entity is a Cyprus Tax Resident or is not a Cyprus Tax Resident Company.
  • If your receive dividend income from a foreign Company ((note 2), you have no obligation to pay any tax (SDC) in Cyprus taking into consideration that you meet the following conditions.
    • The overseas company/entity that pays the dividend, has investment income less than 50% of its overall income
    • The tax rate of the country the overseas company is taxable is not significant lower that tax rate of Cyprus. Cyprus Tax Authorities clarified that significant lower equals to 6.25%. 

 

Interest Income – Individuals (Cy Tax residents / Non-Cy Tax residents). 

Facts: The owner/shareholder (individual) finance the Cyprus company through a loan and not through equity (i.e. share capital)

  • For Cyprus Tax Residents individuals: If you receive interest income from your Cyprus Company due to the loan provided, the interest income is not subjected to SDC and therefore no tax withheld by the Cyprus Company pays the interest. The interest income is subjected to personal income tax rates.
  • For Non-Cyprus Tax Residents individuals: If you receive interest income from your Cyprus Company due to the loan provided, the interest income is not subjected to SDC and therefore no tax withheld by the Cyprus Company pays the interest. The interest income is subjected to tax rates of the country your are tax resident.

Interest Income – Companies (Cy Tax residents / Non-Cy Tax residents)

Facts: The parent or related/unrelated company finance the Cyprus company through a loan and not through equity (i.e. share capital)

    • If the lender Company is a Cyprus Tax Resident: If you receive interest income from the borrower, a Cyprus Company the interest income is not subjected to SDC taking into consideration that its is your business activity to provide loans (note 3). The interest income is subjected to Cyprus Corporation tax which is 12,5% (after deducting all the related expenses).
    • If the lender Company is a Non-Cyprus Tax Resident: The interest income is subjected to the country’s tax law and rules of the lender. The Cyprus Company (borrower) pays the interest gross to the borrower from the borrower, a Cyprus Company the interest income is not subjected to SDC taking into consideration that its is your business activity to provide loans (note 3). The interest income is subjected to Cyprus Corporation tax which is 12,5% (after deducting all the related expenses).

Notes:

  1. There is a possibility that tax you need to pay on the your tax residence country as an individual or as a company. You need to consult your tax advisor in your country your are residence.
  2. Tax or any withheld amount can be withheld at source or will be paid in the country where the Company is taxable. For example, if the company that distribute dividends to Cyprus Company is a Spain company, then tax (WHT) will be paid according to the tax rules in Spain.
  3.  The definition of business activities for the provision of loans can be challenged by the Cyprus Tax Authorities. The interest income in that case will be subjected to 30% and not to 12.5%.
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