SOURCE OF INCOME
SPECIAL DEFENCE CONTRIBUTION (SDC)
Special Defence Contribution (SDC) is imposed on Cyprus tax resident companies and tax residents and domiciled individuals on the following sources of income:
Dividends received by individuals
Dividends received by companies (Note 1)
Interest arising from or closely connected to the ordinary course of business
Interest received by an individual from Government saving certificates or bonds
Rental income (reduced by 25%)
Dividends received by a company resident in Cyprus from another Cyprus company are exempt from taxes, excluding dividends paid indirectly after the lapse of four (4) years from the end of the year when the profits which were distributed as dividends were generated.
Dividends received directly or indirectly from dividends on which defence contribution has already been paid are exempt from SDC.
Dividends received by a company resident on Cyprus or a foreign company maintaining a permanent establishment in Cyprus from abroad are exempt from tax unless:
a) more than 50% of the paying company’s activities result directly or indirectly in investment income (non-trading income); and
b) the foreign tax burden of the dividend paying company is significantly lower than the tax burden in Cyprus (i.e., an effective tax rate of less than 6.25% / 50% of the Cyprus Corporate Income Tax (CIT)).
A company resident in Cyprus is deemed to have distributed 70% of its profits after taxation in the form of dividends at the end of the second year following the tax year in which such profits were generated. The deemed dividend distribution applies only in cases where the ultimate direct/indirect shareholders of the company are Cyprus tax resident and domiciled individuals.
Aggregate profits of the last five (5) years prior to a company’s dissolution, that have not been distributed or deemed to be distributed, shall be considered as distributed on dissolution and shall be subject to SDC.
Companies under a voluntary dissolution or liquidation are obliged to submit within one (1) month from the date of the approval of the relevant resolution, a deemed dividend declaration and pay any SDC relating to the profits of the specific tax year and the two (2) preceding years.
The above provisions are not applicable for dissolution under reorganisation, in accordance with certain prerequisites set out in the relevant regulations, or where the shareholders are not resident or non-domiciled in the Republic of Cyprus.
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