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Special Contribution for Defence Law

 

Rates

 

All residents of the Republic are subject to defence contribution on the sources of income set out below:

 

Dividends 17%
Interest income 30%
Interest received by an individual from Government Savings Certificates 3%
Interest received by an individual from Government Bonds 3%
Interest earned by an approved provident fund 3%
Rental income (reduced by 25%) 3%
Profits earned by public corporate bodies 3%

 

 

Notes:

 

1.   Dividends

 

Dividends paid by a company resident in Cyprus to another company resident in the Republic are exempted from Special Contribution for Defence. However, special defence contribution will be imposed on dividends paid by a company resident in the Republic, to another company, resident in the Republic, after four years from the end of the year in which the profits which were distributed as dividends were made.

 

  • Dividends received by a company resident in Cyprus or a company not resident in Cyprus which maintains a permanent establishment in the Republic from a company which is non-resident in the Republic are exempted from Special Contribution for Defence provided that
  1. no more than 50% of the paying company’s activities result directly or indirectly in investment income  and
  2. the foreign tax is not significantly lower than the tax burden in Cyprus.

 

 When the above exemptions do not apply, the dividend income is subject to Special Contribution for Defence at the rate of 17%.

 

  • Dividends derived directly or indirectly from profits arising from operating a ship under the Cyprus flag within the course of shipping activities or from ship management services are exempted from Special Contribution for Defence.

 

 

  • Any dividends derived directly or indirectly from dividends on which Special Defence Contribution has already been paid are exempted from Special Defence Contribution.

 

2.    Interest income

  • Interest income arising as a result of the carrying on of a business trading activities, including interest closely connected to the ordinary activities of the business, is not considered interest for special defence contribution purposes. Instead is taxed with the normal corporation tax rates.

 

  • Interest income received by a physical person whose total income (including interest) does not exceed € 12.000, has the right to a refund of the amount of defence tax withheld in excess of 3%.

 

Deemed dividend distribution

A company resident in the Republic is deemed to have made a distribution of dividends of 70% of its accounting profits after tax at the end of the two years following the tax year in which the profits relate. A special contribution for defence of 17% is imposed on such 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 already paid during the two years from the profits of the relevant year. In cases where actual dividends are paid after the two year period, any deemed distribution reduces the actual dividend on which the defence contribution is withheld.

 

In the case of a non tax resident shareholder receiving dividend from a company tax resident in Cyprus deriving out of profits which were at any stage suffered with deemed distribution, any defence contribution paid thereon may be claimed back by the non resident shareholders upon receipt of actual dividends.

 

In the case of a company disposing of an asset to an individual shareholder or a relative of his up to second degree relationship or his spouse for a consideration less than its market value or at no consideration, the difference of the market value and the consideration value will be deemed to have been distributed as a dividend to the shareholder and defence tax will be payable thereon. The provision, does not apply for assets originally donated to the company by an individual shareholder or a relative of his up to second degree relationship or his spouse.

 

 

Company dissolution

In  the case of a company dissolution, the aggregate amount of profits arising in the last five years prior to the dissolution, which have not been distributed or be deemed to be distributed, are considered as distributed on dissolution and are subject to defence contribution at the rate of 17%.

 

However, the above does not apply in the case of dissolutions under reorganization schemes as this are defined by certain regulations. Also, it does not apply where the shareholders of the company being dissolved are non-residents in Cyprus.

 

Reduction of capital

In the case of a reduction in the company’s capital, any amount due or paid to the company’s shareholders in excess of the amounts originally paid by the shareholders, is considered as distributable dividends and is subject to special contribution for defence at the rate of 17% (after deducting any amounts which have been deemed as distributable profits and defence tax thereon has been paid).

        

 Tax paid abroad

Any tax paid abroad in respect of income taxed in Cyprus under special contribution for defence tax will be allowed as credit against the defence tax payable on such income irrespective of the existence of a Double Tax Treaty between the countries.