Special Contribution for Defence

The special contribution for defence applies only to income earned by Cyprus Tax residents. Non Tax residents are exempt from special contribution for defence.

Type of Income	Individuals %	Tax Rates Companies
Dividends from companies resident in Cyprus	15	Nil
Dividend from overseas companies	15	Nil or 15% (Note 1)
Interest derived in the normal course of business of the company (considered to be profit)	Nil	Nil
Interest received	10 (Note 2)	10
Profit of semi-governmental	N/A	3
Rent received (less 25%)	3	3
Interest from Government saving, Certificates, Government bonds, Approved provident funds	3	N/A

Notes

Dividend income from abroad is exempt from defence fund contribution provided that the company receiving the dividend owns directly at least 1% of the shares of the company paying the dividend. The exemption does not apply if:

the company paying the dividend engages directly or indirectly more than 50% of its activities that give rise to an investment income and
The foreign tax is under 5%

A 15% special contribution is payable when the exemption is not applicable.

For an individual whose total income (including interest) does not exceed C£7.000 in a taxable year, the rate is reduced to 3%. Interest income from savings and development bonds of the Cyprus government and all interest earned by a provident fund is subject to special contribution for defence at 3% (instead of 10%).

Dividends received from companies before the 31 December 2002, which according to the legislation in force at that time it was net of 20% withholding tax, and not distributed as dividends up to 31 December 2002, can be distributed within six years from the date of their receipt without any further tax deduction.

In the case of interest and dividends received gross any defence due is payable at the end of the following month from the one in which they were received.

Special contribution for defence on trading profits and rental income is payable in 6 monthly intervals on 30 June and 31 December each year.

International business companies electing to be taxed at the rate of 4,25% for the years 2003, 2004 and 2005 will not be subject to defence fund contributions on any income arising on the three year transitional period.

Foreign taxes paid can be credited against the defence tax liability.

Deemed dividend distribution

If a Cyprus resident company does not distribute a dividend within two years from the end of the tax year then:

70% of accounting profits (after adjustments) are deemed to have been distributed.
15% special contribution for defence is imposed on deemed dividend distribution applicable to shareholders who are residents of Cyprus.
Deemed distribution is reduced with payments of actual dividends, which have already been paid during the two years following the year in which the profits relate to.

When an actual dividend is paid after the deemed dividend distribution, then special contribution for defence is imposed only on the additional dividend paid.

The deemed dividend distribution applies to accounting profits starting from the year 2003 onwards.