Special contribution for defence is imposed on dividend income, ‘passive’ interest income and ‘passive’ rental income earned by Cyprus tax residents.

Non-tax residents are generally exempt from special contribution for defence.

It is charged at the rates shown in the table below:

Individuals Legal entities
% %
Dividend income from Cyprus tax resident companies 17 (1) Nil (1)
Dividend income from non-Cyprus tax resident companies 17 Nil (2)
Interest income arising from the ordinary activities or closely related to the ordinary activities of the business Nil (3) Nil (3)
Other interest income 30 (4) 30 (4)
Rental income (reduced by 25%) 3 (4) (5) 3 (4) (5)


1. Dividends received by a Cyprus tax resident company from other Cyprus tax resident companies are excluded from all taxes, unless they are indirectly declared after the lapse of four years from the end of the year in which the profits were generated, in which case they may be subject to Special contribution for defence at 17% (20% in 2013). Dividends which emanate directly or indirectly out of such dividends on which special contribution for defence was previously suffered are exempt.

2. This exemption does not apply if:

  • more than 50% of the paying company’s activities result directly or indirectly in investment income and
  • the foreign tax is significantly lower than the tax burden in Cyprus. The tax authorities have clarified through a circular that “significantly lower” means an effective tax rate of less than 6,25% on the profit distributed.

When the exemption does not apply, the dividend income is subject to special contribution for defence at the rate of 17% (20% in 2013).

3. Such interest income is subject to personal income tax / corporation tax.

4. The Special contribution for defence rate on interest income of 30% is effective for interest received or credited from 29 April 2013 (the previous rate was 15%).

Interest income from Cyprus government savings bonds and development bonds and all interest earned by a provident fund is subject to Special contribution for defence at the rate 3% (instead of 30%).

In the case where the total income of an individual (including interest) does not exceed €12.000 in a tax year, then the rate on interest income is reduced to 3% (instead of 30%).

For rental income where the tenant is a Cyprus company, partnership, the state or local authority Special contribution for defence on rental income is withheld at source and is payable at the end of the month following the month is which it was withheld. In all other cases the Special contribution for the defence on rental income is payable by the landlord in 6 monthly intervals on 30 June and 31 December each year.

For interest and dividends paid to Cyprus tax residents any Special contribution for defence due is withheld at source and is payable at the end of the month following the month in which they were paid.

However, Special contribution for defence due on dividends, interest and rental income from abroad is payable in 6 month intervals on 30 June and 31 December each year.

5. Rental income is also subject to personal income tax / corporation tax.

Foreign taxes paid can also be credited against the Special contribution for defence tax liability.

Deemed dividend distribution

A Cyprus tax resident company is deemed to distribute as a dividend 70% of its accounting profits (as adjusted for Special contribution for defence purposes(1) and net of corporation tax, Special contribution for defence on company incomes, capital gains tax and unrelieved foreign taxes) two years from the end of the tax year in which the profits were generated.

Such a deemed dividend distribution is reduced with payments of actual dividends paid during the relevant year the profits were generated or paid during the two following years.

On the remaining net amount (if any) of deemed dividend 17% (20% for 2013) Special contribution for defence is imposed to the extent that the ultimate direct/ indirect shareholders of the company are Cyprus tax resident individuals (a rate of 3% is applicable on deemed dividend distribution of Collective Investment Schemes).

When an actual dividend is paid after the deemed dividend distribution date, then if Special contribution for defence is due on such a dividend, the tax is imposed only on the amount of the actual dividend paid which is over and above the dividend that was previously deemed to have been distributed and previously suffered Special contribution for defence.

1. A number of adjustments to the accounting profit are required for deemed distribution purposes, including for tax years 2012, 2013 and 2014 if the company has acquired in those years plant, machinery or buildings (excluding private motor vehicles) for business purposes, the cost of these assets will be deductible against the accounting profits.

Disposal of assets to shareholder at less than market value

When a company disposes of an asset to an individual shareholder or a relative of his up to second degree or his spouse for a consideration less than its market value, the difference between the consideration and the market value will be deemed to have been distributed as a dividend to the shareholder. This provision, does not apply for assets originally gifted to the company by an individual shareholder or a relative of his up to second degree or his spouse.

Company dissolution

The cumulative profits of the last five years prior to the company’s dissolution, which have not been distributed or deemed to have been distributed, will be considered as distributed on dissolution and will be subject to Special contribution for defence at the rate of 17%, 20% for 2013, (3% for Collective Investment Schemes).

This provision does not apply in the case of dissolution under a Reorganisation.

Reduction of capital

In the case of a reduction of capital of a company, any amounts paid or due to the shareholders over and above the paid up share capital will be considered as dividends distributed subject to special defence contribution at the rate of 17% (20% for 2013) after deducting any amounts which have been deemed as distributable profits.

The above provisions apply only to the extent that the ultimate shareholders (direct or indirect) are Cyprus tax resident individuals.

The redemption of units or shares in a Collective Investment Scheme is not subject to the above provisions.

Special contribution for defence 08/09/2014