Dividend Tax in CyprusUpdated on Tuesday 22nd September 2015
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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 for 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.
The dividend tax received by a holding company in Cyprus
The taxation of dividend 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 depended 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% from 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.