Deemed dividend distribution explained

A Cyprus tax resident Company, is deemed to have made a dividend distribution of 70% of its accounting profits (after tax) in the form of dividends at the end of the two years from the end of the tax year in which the profits relate. The Company must account for 15% Special Contribution for Defence (“Defence Tax”) on the deemed distributed amount and inform the tax authorities by the end of the second year.

In arriving at the amount of the payable Defence tax of the deemed distribution, any actual dividend which is distributed during the two year period out of the profits of the year in question, is deducted.

The deemed distribution provisions do not apply to profits which relate to non-resident shareholders.

In case a Cyprus Subsidiary (“Cysub”) owned by another Cyprus Holding Company (“Cyhold”) distributes dividends, these dividends are exempt from Defence Tax. If the Cysub does not distribute any dividends by the end of the second year after the end of the year in which the profits relate to, the deemed distribution provisions apply and 15% Defence Tax is calculated on the 70% of these profits ignoring the exemption for dividends received by a Cyprus Company¹.

If Cyhold is owned by a foreign resident individual or corporate entity shareholder and Cysub pays actual dividends (relating to the year of profits which have already been subject to deemed distribution) to the Cyhold, these dividends will be paid net of the Defence tax (which has already been deducted). When the Cyhold pays these as dividends to the foreign resident shareholder, these will also be paid net of Defence tax and the individual shareholder will then be able to claim from the Cyprus tax authorities a refund equal to the amount deducted under the deemed distribution regime.

Disclaimer

¹ A Cyprus Company (tax resident in Cyprus) is exempt from paying Defence tax on dividends received from its subsidiary. This exemption is subject to conditions.