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Special Contribution for Defence Law

The Special Contribution for Defence Law was introduced in 1984 in an effort to boost the country’s budget. Over the years this contribution resulted in just another extra tax targeting specific types of income as described below.

Dividends
Every resident person receiving dividends from a company whether incorporated in Cyprus 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 except from dividends paid indirectly after 4 years from the end of the year in which the profits were distributed as dividends arose. 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 6,25%).

Interest
Cyprus Special Contribution for Defence Law
Every resident taxpayer who receives or is credited with interest is subject to special defence contribution at 30%. Interest 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%.


Rental income
Rental income is subject to defence contribution at the rate of 3% after allowing a deduction of 25% on the gross rental income.

Deemed Distribution
A company resident in Cyprus is deemed to account for a dividend distribution of 70% of its profits after tax every two years, to the extent of the percentage of profits attributable to Cypriot resident shareholders, and account for 17% defence contribution thereon (3% on deemed dividend distribution of Collective Investment Schemes).

A deduction will be given for the acquisition cost of plant and machinery (excluding private motor vehicles) which were acquired during the tax year 2012,2013 and 2014 when calculating the deemed interest provision for these taxyears.

In this point we need to clarify that the term "tax" includes in addition to the corporate tax:

  • the Special Defence Contribution tax
  • the Capital Gains tax and
  • any tax paid abroad that has not been credited against income tax and/or special defence tax payable for the relevant year.

The deemed distribution provisions do not apply to profits attributable to non-resident shareholders.

Disposal of assets to shareholder at less than market value
In the case where a company disposes an asset to an individual shareholder or to his or her relative of up to second degree or his or her spouse, without consideration or for consideration which is below the market value of the asset disposed, it is deemed that the company has distributed dividends to its shareholder, equal to the difference between the market value of the asset and the amount of the consideration. This provision, will not apply in case the asset was received by the company by way of a gift from its individual shareholder or from his or her relative of up to second degree or from his or her spouse.

Company dissolution
The aggregate amount of profits in the five years prior to the company dissolution, which have not been distributed or be deemed to be distributed, will be considered as distributed on dissolution and will be subject to defence contribution at 17% (3% for Collective Investment Schemes).
Companies that are under voluntary dissolution or liquidation are obliged to submit within one month from the date of the approval of the resolution, a deemed dividend declaration and pay any special defence contribution in relation to the profits of the specific tax year and the two preceding years.
The Commissioner has the right to issue an assessment for the purpose of collecting the special defence contribution in relation to the above. The deemed dividend distribution provisions do not apply on any accounting profits arising during the dissolution or liquidation if the assets of the company are not sufficient for the repayment of its creditors and no amount is available to be distributed to its shareholders.
Assets that are distributed to the company's shareholders upon the company's liquidation or dissolution, which have a market value that exceeds the cost of their acquisition by the company, the deemed distribution provisions will apply. The amount of the dividend that is deemed to be distributed to its shareholders will be equal to the difference between the market value of the assets and the cost of acquisition of the particular asset by the company.
The deemed divided distribution of profits that become realized upon the company's dissolution or liquidation may not exceed the amount of the net assets distributed to the shareholders.
The dissolution of an open-ended or closed-ended collective investment scheme falls under the deemed distribution provisions but the undistributed profits will be subject to defence contribution of 3%.
These provisions do not apply in the case of a liquidation under reorganisation, in accordance with regulations to be issued or if the shareholders are not Tax Resident in Cyprus.

Reduction of capital
In the case of a reduction of capital of a company, any amounts due or paid to the shareholders up to the amount of the undistributed taxable income of any tax year calculated before the deduction of losses from prior years, will be considered as distributed dividends subject to special defence contribution at 17% (after deducting any amounts which have been deemed as distributable profits).

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.