SPECIAL CONTRIBUTION FOR DEFENCE FUND
Special contribution for defense fund is imposed on the income earned by Cyprus tax residents. Non-tax residents are exempt from special contribution for defense fund. Such tax is charged at the rates shown in the table below and levied on the gross income received or credited.
TAX RATES
|
INDIVIDUALS % |
LEGAL ENTITIES % |
Dividend income from Cyprus resident Companies * |
17 |
Nil |
Dividend income from non-Cyprus resident Companies |
17 |
Nil |
Interest income arising from the ordinary activities or closely
related to the ordinary activities of the business (active income)and interest earned by an open or close collective investment scheme |
Nil |
Nil |
Other interest (passive income) and notional interest. |
15 |
15 |
Interest from saving certificates, development bonds and deposits with the Housing Finance Corporation |
3 |
15 |
Interest accruing to provident fund |
Nil |
3 |
Rental income minus 25% |
3 |
3 |
* Donation of assets to related parties is deemed to be a dividend distribution at the market value of the donated assets and will be taxed at the applicable rates.
EXEMPTION
Dividend income from abroad is exempted from defense contribution provided that:
- more than 50% of the income of the company paying the dividends derives directly or indirectly from trading activities, or;
- the tax paid by the foreign subsidiary is not significantly lower than that of Cyprus.
When the exemption does not apply, the dividend income is subject to defense contribution at the rate of 17%.
REFUND
For individuals, whose annual income (including interest), does not exceed the amount of € 11,960.21 the rate is reduced to 3%.
PAYMENTS
Special contribution for defense is payable in 6 monthly intervals on 30 June and 31 December each year.
In the case gross interest and royalties are received, any defense due is payable at the end of the month following the month in which they were received.
For rents paid to any person subject to Cyprus Tax by companies, partnerships, the Government or any Local Authority, Special Contribution to Defence Fund must be withheld at source and paid on the above 6 monthly basis.
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 (after some adjustments) are deemed to have been distributed
- 17% special contribution for defence is imposed on deemed dividend distribution applicable to shareholders (both individuals and companies) who are residents of Cyprus
- 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 defence tax is imposed only on the additional dividend paid.
Deemed distribution does not apply to the shareholders who are not Cyprus residents.
The profits of a Cyprus Tax resident Company which are attributable either directly or indirectly to shareholders who are not Cyprus tax residents will not be subject to deemed dividend distribution.
Furthermore, in case where such non-Cyprus tax resident shareholders constitute 100% of the ultimate shareholders of the company, the company is not required to submit a deemed dividend distribution return.
Instead, the company's directors and auditors are required to submit declarations confirming that 100% of the shareholders of the company are directly and/or indirectly non-Cyprus tax residents.
In the case of actual dividend distribution to non – Cyprus tax resident shareholders out of profits which at some point have been subjected to the provisions of deemed dividend distribution, then the corresponding amount of special defence contribution may be claimed for refund by these non – Cyprus tax resident shareholders.
DISSOLUTION OF COMPANIES
The total profits of the last five years prior to the dissolution not yet distributed as dividends are deemed to be distributed in the dissolution and will be subject to Special Defence Contribution at the rate of 17% applicable to shareholders. The declaration of deemed distribution and the payment of the relevant Special Contribution to Defense Fund must be made within 30 days from the date of the resolution for liquidation.
These provisions do not apply in the case of dissolution under reorganization, in accordance with certain pre-requisites set out in regulations and where the shareholders are non-residents in the Republic.
REDUCTION OF CAPITAL
In the case of a reduction of capital of a company, any amounts due or paid to the shareholders in excess of the share capital will be considered as distributed dividends subject to special defence contribution at 17% (after deducting any amounts which have been deemed as distributable profits).
These provisions do not apply where the shareholders are non-residents in the Republic.
TAX CREDIT FOR FOREIGN TAX PAID
Any tax suffered abroad on income, which is subject to special defence contribution, will be credited against any defence contribution payable on such income irrespective of the existence of a double taxation treaty. |
