Distribution and deemed dividend distribution

Individuals who are Tax residents of Cyprus and receive dividends either from Cyprus or from abroad, are taxed with a Defence Contribution at the rate of 15%. The levy is withheld at the source, if the company paying the dividend is a Tax resident of Cyprus. If the person receives a dividend from a foreign company, he is required to declare it and pay the Defence Contribution. If the dividend has been subject of withholding Tax overseas, it may be granted of double Taxation deduction. Dividends paid by a Cyprus resident company to another Cyprus resident company, is exempt from the payment of Special Defence Contribution. Dividends paid by a company resident in Cyprus, by a company not resident in Cyprus, are exempt from the payment of Special Defence Contribution. The exemption is not applicable if the company paying the dividend is:
(a) Engaged in activities at a percentage of 50% and more, which lead to investment income, and/or
(b) The foreign Tax burden on the income of the company paying the dividends is significantly less than 5%.
In the event that a company resident in Cyprus is paying dividends to a company, or individual who is resident abroad, dividends are not subject to a Defence fund. For verification purposes of the term non-resident in Cyprus, companies should send their shareholders to complete the questionnaire I.R.42 Q, which must be completed and returned to the company in order to decide whether to exclude Defence Contribution or not.
For persons who are non residents of Cyprus, companies must submit to the IRD the standard form I.R.42 “Declaration for exemption from the standard special Defence Contribution on Defence dividend” and the standard form for I.R.61AM “Retention status of Special Defence Contribution from Dividends”.
Deemed dividend distribution
Companies that are Tax residents in Cyprus shall be deemed to distribute as dividends to their shareholders, 70% of the accounting profits after deduction from the Taxation, within 2 years from the end of the fiscal year in which the profits are mentioned.
The Law concerning the Special Defence Contribution was recently amended so that the term “Taxation” includes not only income tax paid in Cyprus, but also the Defence levy, the capital gains tax and taxes paid abroad.
It is noted that in calculating the accounting profit, which is subject to a deemed distribution, the following are excluded:
■ deferred Taxes
■ losses carried forward from previous years
■ revaluations of assets and additional depreciation, arising or resulting from the revaluation of property or securities
In case of deemed distribution, the Defence fund is retained from the deemed dividend, which is attributable to those who are residents and resident companies of Cyprus.
The Defence Contribution is not retained on the deemed dividend which is attributable to non-residents of Cyprus. Any actual dividend distributed during the 2 years after the end of the fiscal year, in which the profits are mentioned, reduces the amount of deemed dividends.
All companies must complete and submit to the IRD the standard form I.R.623 ‘Declaration of deemed dividend ” no later than January 31st following December 31st two years after the year in which the profits are deemed as distributed. The arising Defence Contribution should be concurrent with the submission of this form. Companies are not required to submit the form I.R.623 when the real shareholders of both natural and legal persons are not residents of Cyprus.