SPECIAL CONTRIBUTION FOR DEFENCE
Special contribution for defence is payable at the following rates:
|• Dividend (1,2,3) – as from 1/1/2014
|• Interest (as from 29/4/2013)
|• Resident individual’s interests received from the Cyprus Government savings and developments bonds and corporate bonds
|• Interest received by Approved Provident Fund
|• Rental income (reduced by 25%)
1. Special contribution for defence is calculated on the above types of income earned by all tax residents of Cyprus (including resident Cyprus companies) and is not applicable on dividends payable to non-resident persons of Cyprus. Prior to 16 July 2015 individuals were subject to special contribution for defence if they were tax resident in Cyprus. As from 16 July, 2015 individuals are subject to special contribution for defence if they are also Cyprus domiciled. An individual is Cyprus domiciled if he has a domicile of origin in Cyprus per Wills and Succession Law. Irrespective of the domicile of origin of a person, an individual is a Cyprus domiciled if he has been a tax resident in Cyprus for at least 17 out of the 20 tax years preceding the tax year of assessment.
2. Dividend Income from non–Cyprus tax resident companies is exempt. The exemption does not apply when:
– the paying company’s activities lead to investment income which exceeds 50% of the total income and
– the foreign tax is significantly lower than the tax in Cyprus. Significantly lower means lower of 6,25%.
3. Dividends received by a Cyprus tax resident company from other Cyprus tax resident companies are tax-free unless they are declared indirectly after the lapse of four years after the year in which the profits arose, in which case they may be subject to special contribution for the defence at 17%.
Dividends emanating directly or indirectly out of such dividends on which Special Defence Contribution was previously suffered are exempt.
Deemed dividend distribution
As from 2003, the resident Cyprus companies are deemed to have distribute, in the form of dividends, 70% of their accounting profits after deducting the Cyprus corporation tax (Cyprus corporation tax means income tax, capital gains tax, special defence contribution and foreign taxes), from the end of the second year of the year when the profits have been related and accounted and are subject to special defence contribution. The deemed distribution is reduced by any actual dividends distributed.
Based on the amendment Act of 2012 deemed dividend distribution does not apply with respect to profits for the years 2012, 2013 and 2014 to the extent that the company acquires plant, machinery and buildings. For the purpose of deem dividend distribution, it is not allowable any cost of acquisition of property, plant and equipment after 1/1/2015.
When an actual dividend was paid after the deemed distribution, then special defence contribution is imposed on the dividend paid over and above the dividend previously deemed to had been distributed.
Reduction of capital
In the case of a reduction of capital, amounts paid or due to shareholders exceeding the paid-up share capital will be considered as dividends distributed and will be subject to special defence contribution.
The total of the last five years’ profit preceding the liquidation which have not been distributed or deemed to be distributed will be considered as distributed on liquidation and are subject to defence contribution. Dissolution of a company in the course of Reorganisation is exempted.
Disposal of Asset to a shareholder at a price less than market value
When a Cyprus company disposes an asset to an individual shareholder or a relative of his or his spouse at a price less than its market value, the difference between the consideration and the market value will be deemed to have been distributed to the shareholder. This provision doesn’t apply for assets gifted by an individual shareholder or a relative of his up to a second degree or his spouse.
With the aim to give motives for loan restructuring, tax incentives have provided, in those cases that such a restructuring include the transfer of immovable property to the lender against the loan obligation. (Subject to conditions). The disposal should take place until 31 of December 2022.
If a part of the sale proceeds, will return to the borrower, then this amount is subject to IT, CGT and SDC, which must be withheld and paid to the authorities by the loan provider. The cost of acquisition is the amount had been agreed for the purpose of restructuring.
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Last update: March 2022
The authors expressly disclaim all and any liability and responsibility to any person, entity or corporation who acts or fails to act as a consequence of any reliance upon the whole or any part of the contents of this publication.
Accordingly no person, entity or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances.
PKF Cyprus firms are member firms of the PKF International Limited network of legally independent firms and do not accept any responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.