Dividends represent the amount of money paid by a company to its shareholders from the net profits of the business. Dividend payments are usually made on a yearly basis in Cyprus and the shareholders receive this money in accordance with the value of their shares in the company. As any income, dividends are subject to taxation in Cyprus under certain conditions.
Our Cyprus company formation consultants explain how dividends are taxed in this country.
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Payment of dividends in Cyprus
Dividends are incomes earned by the shareholders of Cypriot companies and they represent a part of the net profits returning to them in accordance with their contribution to the share capital and value of the shares owned in the respective companies. As income, dividends are taxed according to the Income Tax Law in Cyprus and are subject to withholding levies, however, there are specific rules to respect in this sense.
The taxation of dividends in Cyprus is based on the fiscal residency of the company, as it follows:
- domestic companies will be taxed on the worldwide income;
- foreign companies operating here will be taxed on the income generated in Cyprus.
Foreign companies can operate through branch offices and subsidiaries in Cyprus and they can both be protected against double taxation through the agreements signed by Cyprus. However, it should be noted that subsidiary companies will be treated as domestic ones in Cyprus.
There are two types of dividends that can be issued in Cyprus. The first and most common ones are final dividends which are paid after the financial statements have been audited and filed with the Trade Register. The second type of dividends are interim ones and they refer to distributions made to shareholders prior to their annual general meeting and financial statement filings.
If you want to open a company in Cyprus and need information on the dividend tax, feel free to address your questions to our specialists.
The rate of the dividend tax in Cyprus
In case the exceptions from taxation do not apply, the dividends received by Cypriot resident companies and individuals from non-resident businesses will be imposed with a tax rate of 17%. Our company formation advisors in Cyprus can offer more information on the taxation of dividends received from foreign companies.
The applicability of the dividend tax
In Cyprus, the dividend tax does not apply to non-residents, either corporate shareholders or individuals. The dividend tax does apply when dividends are received by a Cypriot resident taxpayer. When discussing tax purposes, a company is considered a Cypriot resident company if it has its management headquarters based in Cyprus. Likewise, an individual is a Cypriot taxpayer if he or she have lived in Cyprus for more than 183 in one tax year.
Holding companies in Cyprus do not have to pay withholding taxes on dividends, except for several cases detailed below. Our Cypriot company formation specialists are available in case you have any questions regarding detailed information for companies and individuals who are subject to tax.
The taxation of dividends in Cyprus
As stated above, dividends are usually exempt from tax in Cyprus, unless they are received by a Cypriot resident company or individual. The dividends received by a holding company from its subsidiaries will be taxed according to the country of residence of the payer. The Parent-Subsidiary Directive applies in this case and if the companies fulfill all the conditions, the dividend will be received free of tax. When the dividend does not come from a country with which Cyprus has signed a double tax avoidance treaty, the domestic rate for the taxation of dividends applicable in the source country will apply to the dividends.
When dividends are received from foreign companies, either EU or non-EU legal entities, no income tax is applicable to dividend income. An exemption from the special contribution for defense also applies, subject to certain conditions. Our company formation experts in Cyprus can give you more detailed information about the aforementioned defense tax.
The Cyprus dividend tax and holding companies
A special case where the dividend tax in Cyprus is levied under specific criteria is related to holding companies. These entities are taxed based on the residency of the taxpayer and in most cases are advantaged when they are EU resident companies. This way, they will benefit from the EU-Parent Subsidiary Directive which specifies that dividends obtained from an EU-based company will be imposed with no withholding tax. However, there are certain conditions to be met in order for the shareholders to benefit from this exemption.
In the case of non-EU companies issuing dividends to Cyprus shareholders, a double tax treaty can lead to a lower rate of the dividend tax, whereas no agreement is in place, the standard rate of 20% will apply on dividend payments.
If you need detailed information on the taxation of dividends, our Cyprus company formation agents can advise you. We also offer accounting services in order to fully understand the taxes you need to pay in this country.
Taxation of dividends issued by foreign companies to Cypriot shareholders
Cyprus offers many tax advantages, among which many exemptions, one of them applying to dividends received from foreign companies (EU and non-EU located). These are also exempt from the defense tax in the case of foreign companies in which Cypriot shareholders own at least 1% of the share capital.
With respect to the conditions under which the defense tax will be levied, these are two and must be met at the same time. The first condition is for the foreign company distributing the dividends to be entitled to more than 50% of the investments made by the company and for the dividend tax paid by the foreign company in its home country to be lower than the one paid in Cyprus.
Our company registration agents in Cyprus can offer more information on the special defense contribution that must be paid by businesses in this country.
Taxation of shareholders when receiving dividends in Cyprus
Over time, the Cyprus tax laws have suffered various alterations and one of the most important ones refers to the application of the dividend tax on the shareholders receiving dividends from EU and non-EU companies. According to the law, these will not be imposed with the dividend tax. It is worth noting that the dividend tax exemption is available for both Cyprus residents and non-residents. However, in some case, the special defense contribution could be imposed on the payment of dividends.
Our company formation advisors in Cyprus can offer more information on the taxation of shareholders of local businesses.
Exceptions from the dividend tax exemptions in Cyprus
Even if most of the times, the dividends are exempt from taxation in Cyprus, there are also cases in which this rule does not apply. These cases are related to the Special Defense Contribution and apply:
- – if the foreign company paying dividends to Cypriot shareholders invests 50% or more of its profits in other activities which generate further investment income and the tax paid in its home country is lower than 6.25%;
- – if the dividends cannot be deducted from the taxable income of the company paying them;
- – if the dividends are paid by a Cyprus company to another local company which was exempt from the SDC;
- – if the dividend tax applied in the foreign company’s home country is lower than 12.5% (the corporate tax rate in Cyprus).
Companies paying the Cyprus dividend tax must issue certificates which provide information about the amounts paid to their shareholders and the value of the SDC.
If you want to open a company in Cyprus as a foreign investor, we can help with the registration procedure of the company.
Dividends under Cyprus’ double tax treaties
Cyprus has signed many double tax treaties under which dividend payments are totally or partially exempt from taxation or benefit from reduced tax rates. The taxation of dividends in Cyprus will depend on the agreement with the respective country and the avoidance of double taxation will be granted under the form of a tax credit or exemption.
Cyprus has a very attractive taxation system which provides for other tax incentives related to dividend payments. We remind investors we can also assist them with accounting services in Cyprus.
We remind foreign investors that in order to pay taxes in Cyprus, they must register with the local tax authorities.
Other taxes in Cyprus
Here are the most important taxes to consider as a company in Cyprus:
- the corporate income tax which is levied at a rate of 12,5%;
- the special defense contribution which is levied at rates ranging between 3% and 15%;
- the capital gains tax which is imposed at a rate of 20%;
- the value added which is imposed at a standard rate of 19%, however, lower rates are available.
After the company registration process in complete in Cyprus, any legal entity becomes a registered taxpayer. The most important taxes for companies in Cyprus are the corporate income tax, the VAT, the special contribution for defense or the personal income tax applicable for individuals. If you need VAT registration services in Cyprus, our team can help you.
For detailed information about company registration in Cyprus and other details about taxation, please feel free to contact our company formation representatives in Cyprus.