Special Defence Contribution (SDC)

Cyprus Lawyers, G. Kouzalis LLC, would like to inform about the special defence contribution (sdc). SDC is imposed only on non-exempt dividend income, ‘passive’ interest income. Also, rental income earned by Cyprus tax resident companies and Cyprus PEs of non-Cyprus tax resident companies. Non-tax residents of Cyprus with non-Cyprus PEs are exempt from Special Defence Contribution.

Exemption from Special Defence Contribution:

Special exemption for Non- domiciled Cyprus residents exists (subject to approval from Cyprus Tax authorities). From the above SDC Taxation for a period of 17 years. A Cyprus resident Company issues dividends payable to CY tax resident. Then these are subject to SDC rate of 17% and GHS (General Healthcare System) taxation on Gross dividend amount equal to 2.65%. As mentioned above, dividend income may be exempt from SDC, subject to participation exemption criteria.

Dividend

Domestic and foreign dividend income received by a Cyprus resident company is exempt from corporation tax and generally exempt from the Special Defence Contribution(subject to certain conditions in the case of foreign dividends). Dividends receive by a Cyprus company from investments in hybrid instruments that are treat as a tax-deductible expense in the jurisdiction of the payer are treat as trading profits subject to corporation tax but are exempt from the SDC.

CIT

Interest receive by companies in the ordinary course of their business, including interest closely connect to the ordinary course of business, is also consider as ‘active’ interest income and is only taxed under CIT (after deducting allowable expenses) at the standard CIT rate of 12.5%. When companies receive interest that does not satisfy the conditions prescribed immediately above, the interest is considered to be ‘passive’ interest income, which is subject to SDC (without expense deduction) at the rate of 17%. Such ‘passive’ nature interest is, however, exempt from CIT.

Cyprus Government Bonds

As of June 2022, ‘passive’ interest income earned from Cyprus government bonds, Cyprus and foreign corporate bonds listed on a recognized stock exchange, and bonds issued by Cyprus state organizations or by Cyprus or foreign local authorities listed on a recognized stock exchange shall be subject to SDC at the reduced rate of 3%. Moreover, as of 8 June 2022, Cyprus state organizations and local authorities, pension funds, provident funds, and the Cyprus Social Insurance Fund will be subject to SDC at the reduced rate of 3% on all interest income that they earn.

Collective Investment Schemes – Special Defence Contribution (SDC)

Interest received by close-ended or open-ended collective investment schemes (CISs) is never subject to SDC. As it is consider as ‘active’ interest income and is subject to CIT.Gross rental income reduce by 25% is also subject to SDC at the rate of 3% (i.e. effective rate of 2.25%). In addition to CIT (after deducting allowable expenses) of 12.5%. On 13 September 2023, the Cyprus Tax Authority (CTA) issued a Circular pursuant of which rental income from self-catering accommodation. That is rent out via online platforms will be treat, subject to certain conditions. Also, as business income (therefore subject to CIT and exempt from SDC).

Conclusion – Special Defence Contribution (SDC)

This article is provided for informational purposes only and does not constitute legal advice. Readers are advise to consult with legal professionals for advice specific to their individual circumstances. For more information contact G. KOUZALIS LLC, Lawyer in Cyprus at lawfirm@cytanet.com.cy, tel. +357 23811788.