The Special Contribution for Defence tax is another form of taxation targeting specific types of income and applies to Cyprus tax resident persons only.
Every resident person receiving dividends from a company whether incorporated in the Republic or abroad, is subject to special defence contribution at 17% on the amount of the dividend income received. However, dividends paid by a resident company to another resident company are exempt from tax. In addition dividends received by a resident company or a non-resident company which maintains a permanent establishment in the Republic, from a non resident company are exempt from defence contribution.
The exemption from defence contribution will not apply if the overseas company paying the dividend:
- engages more than 50% in activities which give rise to investment income, AND
- the foreign tax burden on the income of the company paying the dividend is substantially lower than the Cyprus tax burden (this has been interpreted as a tax burden lower than 5%).
Every resident taxpayer who receives or is credited with interest is subject to special defence contribution at 30% as of 29 April 2013.
Interest that is received as a result of the carrying on of a business activity, including interest closely connected to the ordinary activities of the business, is not considered interest for the purposes of special defence contribution.
Interest from Government Savings Certificates, Government Bonds and deposits with the Housing Finance Corporation, as well as interest earned by approved provident funds, is subject to defence contribution at 3%.
A company resident in the Republic is deemed to have made a distribution of 70% of its profits after tax, in the form of dividends at the end of the two year period from the end of the tax year in which the profits relate to the extent that the profit relate to Cypriot resident shareholders only and must account for 15% defence contribution thereon. The deemed distribution provisions do not apply to profits, to the extent to which they relate to non-resident shareholders.
Rental income is subject to special contribution for defence at the rate of 3% after allowing a deduction of 25% on the gross rental income.
Unilateral tax relief
Relief for taxes paid abroad is granted in the form of a tax credit against tax payable in Cyprus. The relief is given unilaterally irrespective of the existence of a double tax treaty. Where a treaty is in force the treaty provisions (if more beneficial) would apply.