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The Cypriot taxation system
The Cypriot taxation system is very advantageous for individuals or foreign legal entities wanting to expand their businesses and open new companies. Taxes are applied to both individuals and corporations according to the Tax Law No. 118 released in 2002. The income tax is applied to Cypriot companies on their worldwide income, while foreign companies must pay the income tax according to other provisions. Usually, dividends are exempt from taxation in Cyprus, except when they are received by an individual paying his or her taxes in Cyprus.
Dividend payments in Cyprus
Dividends represent a part of the net profits of a Cyprus company which are distributed to the company’s stakeholders based on their contributions to the company’s share capital and the value of their shares. Dividend payments are usually subject to withholding taxes. The taxation of dividends is based on the residency of the company paying the dividends.
When it comes to Cyprus-based companies, these will be taxed on the income they generate on a global level, which foreign companies with branch offices or subsidiaries in Cyprus will be taxed on the income generated by these two types of entities in Cyprus.
Our lawyers in Cyprus can offer more information on how dividend payments are taxed in this country.
Tax rates for dividend payments in Cyprus
As mentioned above, the dividend tax in Cyprus applies based on residency. A specific fact about Cyprus is the Special Defense Contribution which is part of the corporate tax. Under this contribution, companies must also pay the dividend tax, with a few exceptions. Dividends payments will not be subject to the Special Defense Contribution if:
- a foreign company pays dividends to Cypriot shareholders and if it invests more than 50% of the profits in other investments;
- if the tax paid by the foreign company in its home country is lower than the tax paid in Cyprus;
- if the dividend payments cannot be deducted from the income of the foreign company;
- if the dividends are paid between local companies and at least one of the companies is exempt from the Special Defense Contribution;
- if a foreign company is subject to a lower dividend tax in its home country.
It should be noted that in order to benefit from the exemption from the Special Defense Contribution for dividend payments, the company’s representatives must inform the tax authorities on the amount of money paid to its shareholders and the value of the Special Defense Contribution.
If you need guidance in opening a company, our law firm in Cyprus is at your disposal with detailed information.
The dividend tax received by a holding company in Cyprus
The taxation of dividends in Cyprus for a holding company depends on the country of residence of the payer. This way, according to the EU Parent-Subsidiary Directive, if a shareholder receives dividends from a company established in an EU country the dividends will be received by the shareholder free of any withholding taxes, provided some conditions are met. If the dividends are received from a company located in a non-EU country, then the tax rate for the dividends will depend on whether double tax treaties are enforced between Cyprus and that country. If no tax treaties apply, the dividends will be subject to the normal rate of 20%.
The taxation of dividends received from foreign companies in Cyprus
Dividends received from a foreign company, whether it is established in an EU or non-EU member state are exempt from taxation and are also exempt from paying the defense tax if some conditions are met. Dividends received from a foreign company are not subject to the defense tax if the parent company holds at least 1% of the subsidiary’s share capital.
Companies will be required to pay the defense tax if the following conditions apply at the same time:
- the foreign company distributing the dividends earns more than 50% of the investments that have been made by the company,
- the tax paid by the foreign company is lower than the tax applied in Cyprus.
If the dividends are not exempt from taxation, credits can be obtained if enforced by tax treaties.
Dividend taxation applied to shareholders in Cyprus
According to the amendment brought to the Tax Law in 2003 withholding taxes on dividends have been disabled, so no withholding tax will be applied to shareholders, whether these are Cypriot residents or non-residents. If any withholding tax remains it will be applied as a special contribution to the defense tax.
Dividend payments and double tax treaties in Cyprus
Dividend payments are not regulated only by the Cypriot tax legislation, but also by the tax treaties signed by the government with other countries. Considering these agreements must take into account the tax legislation in the other country, dividend payments can be subject to different taxation criteria.
If you want to open a company and need details about the taxation system you can contact our law firm in Cyprus.