Tax residents of Cyprus that are also domiciled in Cyprus that receive income from dividends, interest and rents are required to pay the Special Defence Contribution (SDC). In essence, the SDC is a tax designed to raise money for the national defence of Cyprus.

Non-domiciled individuals are exempt from SDC. You can read more on non-domicile status here.

Although dividends are exempt from income tax, they are not tax free. There is a 17% SDC tax on profits distributed by companies to their shareholders. However, different conditions apply depending on whether the shareholder is an individual or a company.

Individuals who are shareholders in a Cyprus company must pay the 17% SDC tax on the dividends they receive. This is also applicable if the dividends received are coming from abroad.

If a company in Cyprus receives dividends from another company in Cyprus, it doesn't have to pay the 17% SDC tax on these dividends. However, this exemption applies only if the dividends are distributed within 4 years from the end of the year the profits were earned. After 4 years, the 17% SDC tax applies.

This exemption to payment of the SDC on dividends received by companies is also applicable to dividends received by a company abroad. This means that a company in Cyprus that is a shareholder in a foreign company, generally won't be required to pay the SDC on the dividends received.

However, the exemption does not apply if the following conditions are met:

• The foreign company earns more than 50% of its income from investments (like stocks, bonds, etc.), and

• The foreign company pays significantly less tax on its income compared to what the Cypriot company would pay in Cyprus.

Keep in mind that if a company gives a company asset (like a property) to a shareholder or their close family for free or at below market price, it's still considered as a dividend and is subject to the SDC.

An important aspect of the SDC to have in mind is that when a company in Cyprus makes a profit, it is assumed that it has distributed 70% of the profits as dividends to its shareholders within two years from the tax year which the profits arise from, which means that the shareholders of the company will be taxed on those “deemed dividends” even if they haven't actually received any money.

The company is then responsible to pay the SDC on those “deemed dividends” on behalf of the shareholders and can then charge it on the shareholders.

Companies that pay dividends to their individual shareholders are required to withhold the SDC from the dividends of their shareholders and pay it to the Tax Authorities. Companies must declare these using form TD603 and pay the SDC through the Tax Portal by the end of the month following the month in which the dividends were paid.

Companies are required to submit the Declaration of Deemed Dividend Distribution (TD623) by the 31st January of the third year after the tax year the profits relate to.

Alongside paying SDC on deemed dividends, companies must also pay GHS on these deemed dividends on the same date. Payments are made through the Tax Portal.

Interest is the return on investment when money is saved or invested. If you live in Cyprus and earn interest (with some exceptions), you'll be taxed 17% on that interest.

However, interest from everyday business activities is not subject to SDC. What this means is that when a business such as a bank earns or pays interest as part of its everyday activities, that interest is considered normal business interest and the bank is not required to pay the SDC on that interest.

Additionally, if your total annual income (including interest) is €12,000 or less, you can get a refund for any SDC that you paid (or was withheld from your income) over 3%.

SDC on interest must be withheld and paid to the Tax Authorities using form TD602 through the Tax Portal by the end of the month following the month in which the interest was paid.

In addition to rental income being subject to income tax, it is also subject to the SDC. Specifically, the law imposes a 3% tax on 75% of the gross rental income.

Regardless of the amount, rental income is subject to SDC. The method in which payment of the SDC is made is solely dependent on whether the tenant of your property is an individual or a company.

If your tenant is an individual, you must do the following as the landlord:

If the tenant is a company or partnership, they must withhold SDC at a rate of 3% on 75% of the rent from the gross rental amount. This means that the tenant is responsible for deducting this amount from the gross amount of rent and pay the SDC to the Tax Authorities. To do so, they must: