Any person (individual or business) who is tax resident in Cyprus and has income derived from sources in Cyprus, is obliged to pay Defence fund. The levy is paid according to the income list as below:
Interest
Interest (domestic or foreign) that a person resident in the Republic receives, is subject to the Defence contribution at a rate of 10%. The interest that a person gains through the normal course of his business is exempt from the Defence charge.
Deemed paid interest on debit balances of directors, shareholders or second degree related persons, according to the provisions of Article 39 of the Income Tax Act, shall be considered as interest and are subject to a Defence Contribution of 10%, since such interest is considered to be a notional income of the business.
Persons with a total income of up to € 12.000 per year including interest are taxed at a rate of 3% and are entitled to reimbursement, of any Defence Contribution deducted from interest above this rate. Any interest on savings certificates, development stock of the Cyprus government as well as any interest obtained by the provident fund or the social security fund, is taxed at 3%.
Dividends and deemed distribution of dividends
The amount paid from the profits of a limited liability business, to any shareholder who is resident in the Republic, is subject to a Special Defence Contribution at a rate of 15%. Consequently, businesses which pay or will pay dividends have an obligation to withhold and submit a Special Defence Contribution to the IRD, at a rate of 15% of the dividend amount, of the inhabitants of Cyprus. Regarding the defence contribution on dividends, please refer to the article entitled “deemed distribution of dividends”.
Rent
Any person (individual or business) who is resident in the Republic and has source rental income (either domestic or foreign), is taxed at 3% on the 75% of gross rent amount. Since July 2011, a provision has been inserted regarding withholding the Defence Contribution over rent paid by a business, partnership, the Republic or local authority. The contribution is imposed at a rate of 3% over the 75% of rent paid amount.
Deduction for foreign tax
Deduction in respect of foreign tax on income which is subject to Defence contribution, is granted according to the relevant provisions. The maximum amount of foreign tax credit may not exceed the amount of Defence contribution.
