Dividends
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Incoming Dividends
Cyprus applies a participation exemption regime on received dividends. It applies to dividends received from a resident subsidiary as well as dividends received from a non-resident subsidiary (subject to conditions outlined below).
Dividends received from a Cypriot resident subsidiary
Dividends received by a Cypriot resident company from its Cypriot resident subsidiary are tax exempt.
Dividends received from a non-resident subsidiary
Dividends received by the Cypriot company from a foreign subsidiary are exempt from corporate income tax, but subject to the so-called Special Defence Contribution (“SDC”) with a rate of 15%.
However, dividend income is exempt from SDC, if the company receiving the dividend is resident in Cyprus or a company which is not resident in Cyprus but maintains a permanent establishment in Cyprus. This exemption does not apply if (a) more than 50% of the activity of the paying company results directly or indirectly in investment income and (b) the foreign tax burden is significantly lower than the tax rate payable in Cyprus.
In addition, the above criteria imply that both conditions have to be met for the exemption not to be applicable. For example: if a foreign trading company is held by a Cypriot holding company and the foreign company pays a dividend to the Cypriot company, the dividend will be exempt from any tax even if its tax burden is substantially lower than the Cypriot tax burden (the corporate income tax rate in Cyprus is 10%), as less than 50% of the foreign company results in investment income (the foreign company being a trading company). Since both (a) and (b) of the criteria have to be met for the exemption not to apply, the exemption is almost always satisfied. This results in the non-taxation of the foreign-source dividend.
The above exemption mechanism is applicable to dividends received from EU resident subsidiaries as well as from subsidiaries resident outside of the EU.
A dividend received by a Cypriot company from a non-resident subsidiary where a foreign withholding tax has been levied, and if such dividend is liable to taxation in Cyprus, the tax paid abroad may be credited against the tax payable in Cyprus.
Outgoing Dividends
Outgoing dividends distributed by a Cypriot resident company are tax exempt. This applies to payments to resident shareholders as well as to non-resident shareholders regardless of their country of residence or the existence of a Double Taxation Treaty with that country. (An individual resident shareholder is subject to SDC at 15% on the dividend received).
Cypriot corporate legislation contains regulations regarding deemed distribution of dividends.
