A Guide on Dividends in Cyprus
A Guide on Dividends in CyprusUpdated on Thursday 03rd December 2020
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The shareholders of a company located in Cyprus are entitled to receive dividends for their contribution to the business’ capital. Dividends refer to a portion of the company’s profits, which are established in accordance with the decisions of the company’s board of directors and they can be provided to the shareholders as cash, stocks or other types of assets.
Our team of Cypriot lawyers can offer assistance on the manner in which the dividends are distributed to the company’s founders. It is important to know that dividends in Cyprus are not imposed with a tax on income.
You can also rely on us if you need help in business registration matters or assistance with the tax legislation in Cyprus.
Dividends in Cyprus companies
Dividends represent amounts of money Cyprus company shareholders are entitled to after all the taxes have been paid by the business. Dividends are paid on annual basis and they are issued in accordance with the value of the shares the stockholders own. As an income, these are subject to taxation in Cyprus, however, it should be noted that special regulations apply in their case.
Our law firm in Cyprus is at the service of foreign investors who want to open companies here and need advice on dividend payments.
The Company Law on dividend distribution in Cyprus
The most important law which provides for the distribution of dividends in Cyprus is the Company Act. Under the law, private limited liability companies and joint stock companies are allowed to distribute dividends to their shareholders, provided certain requirements are met. Also, the Company Law provides for both local and foreign shareholders to be entitled to dividends in accordance with their contribution to the share capital of the company.
The Cypriot Law of Companies provides for the following regulations related to the distribution of dividends:
- dividend payments can be made only to those participating in limited liability and joint stock companies in Cyprus;
- the shareholders cannot obtain dividends from all classes of shares issued by the company;
- the distribution of the dividends can be made under specific conditions, such as the end of the financial year;
- in the case of joint stock companies, the distribution of dividends is not possible if the share capital has been reduced;
- the profits distributed under the form of dividend payments cannot exceed the amount of money representing the profits for the former financial year;
- special provisions apply for companies in the investments funds sector, especially for investment companies in Cyprus.
It should also be noted that special provisions related to the distribution of dividends apply in the case of companies under liquidation.
The distribution of dividends is subject to strict regulations which is why it is best to obtain reliable information on the legal ways of obtaining such gains from our lawyers in Cyprus.
How is the distribution of dividends decided in Cyprus?
There are several conditions to be respected when deciding the distribution of dividends in a Cypriot company. Among these, the most important ones are:
- the distribution of dividends is decided during the annual general meeting of the shareholders;
- the amounts of money to be distributed as dividends will be recommended by the company directors;
- the dividends will be paid exclusively from the profits of the company resulted at the end of the financial year;
- the directors can set aside a portion of the amount of money from the dividends (the amount can be used as a reserve fund);
- under the Company Law, dividends cannot be paid in advanced to any of the members in the business;
- dividends payments can be made directly through cheques or warrant sent to the address of the shareholders.
Our lawyers in Cyprus can offer detailed information on the distribution and payment of dividends.
Dividend regulations in Cyprus
Dividends in Cyprus are required to be distributed to the company’s shareholders only from the profits incurred by the respective business. They can’t be paid from the company’s capital.
The board of directors can decide the way in which the dividends are paid to the shareholders. Thus, such payments can be completed as follows:
- final dividends;
- interim dividends.
The interim dividends refer to a payment which is concluded prior to the company’s annual general meeting and prior to filing the financial statements. The final dividends are paid only after the company has concluded the audit on the financial statements.
As a general rule, the above mentioned regulations are prescribed in the company’s articles of association and our Cypriot law firm can offer advice on the most suitable option a company should choose.
The distribution of interim dividends in Cyprus
As mentioned above, Cypriot public companies are subject to specific requirements when it comes to the distribution of dividends. Also known as interim dividends, these types of profits can be distributed to the shareholders under the following conditions:
- the interim accounts have been prepared and they show sufficient funds from which the dividend payments can be made;
- the amount of money to be distributed does not exceed the profits of the company since the end of the previous financial year;
- the amount of money distributed as a dividend to a member in the company will not be deemed as a debt.
Our attorneys in Cyprus can offer more information on the distribution of interim dividends in the case of public companies.
Rules related to final dividends in Cyprus
When choosing to pay final dividends, the representatives of the company should perform several compulsory steps.
First of all the financial statements (after the audit was completed) must reveal that the company provides sufficient profits which will enable the board of directors to distribute the respective dividends.
Further on, during the annual general meeting, the board of directors should present a declaration of dividends, which should not exceed a certain value expressed in the articles of association.
Taxation of dividends in Cyprus
As any other income, dividends can be subject to taxation in Cyprus. It is important to note that only dividends distributed to Cypriot resident companies and individuals can be imposed with an income tax of 17%. In certain cases, the Special Defence Contribution (SDC) can also be imposed on dividend payments.
In most cases, dividend payments are exempt from taxation in Cyprus. The exceptions related to the payment of the SDC apply if:
- the foreign company making the distribution invests more than 50% of its profits in other activities which generate income taxable at a lower rate than 6,25% in its home country;
- if the dividends paid are sent to a Cypriot company already exempt from the SDC;
- if the dividends cannot be deducted from the income tax paid by the company distributing them;
- if the foreign company is subject to a lower corporate tax than the one imposed in Cyprus.
No matter the tax imposed on dividends payments, these can be credited if the home country of the foreign company has signed a double tax agreement with Cyprus. From this point of view, Cyprus has signed numerous double tax treaties.
The income tax applied on dividends in Cyprus
As mentioned above, dividend payments fall mainly under the regulations of the Company Law, but also under those of the Income Tac Act, when referring to the taxed that need be paid on them. These levies are usually imposed as withholding taxes, just like in the case of interest and royalties incomes which is why they can also benefit from the provisions of double tax treaties signed by Cyprus.
From a taxation point of view, the following can be considered:
- Cyprus-registered companies will be taxed on their profits made at a global level,
- foreign companies with operations in Cyprus will be taxed here on the income they make in this country.
When it comes to branches and subsidiaries, the first ones will be taxed on the incomes they generate here, while the others will pay the income tax as domestic entities. However, another important aspect to consider about dividends, is that the shareholders and their residency is an important part when it comes to the distribution of dividends.
There are two types of dividends a Cyprus company can issue: the interim and the final ones. While the interim ones can be distributed prior to the annual general meeting (AGM) of the shareholders and of the financial statement filing requirements are met, the final ones are issued after the AGM and after all financial obligations of the business have been fulfilled.
Holding companies and dividend distribution in Cyprus
Cyprus is one of the most favorable business destinations in Europe when it comes to the taxes applied here and holding companies have a special status. This occurs because Cyprus is also a member of the European Union and companies registered in other member states can benefit from the provisions of the EU-Parent Subsidiary Directive, thus enabling holding companies to be exempt from the withholding tax on dividends. However, there are a few conditions to be met in order for this benefit to be claimed.
This does not mean that companies registered in countries outside the European Union cannot benefit from special tax rules, such as those provided by the agreements against double taxation. Luckily, Cyprus has a vast network of such treaties.
Outside the scope of these treaties, the standard rate applicable as a withholding tax on dividends is 20%.
Cypriot shareholders (companies or natural persons) also have various benefits when receiving dividends from companies registered outside the country. One of the most important refers to the exemption from the Special Defense Tax if they own at least 1% of the shares in the respective companies.
If you need information on the taxation of foreign companies, our Cypriot lawyers can offer detailed information on the legislation regarding them.
Dividend payments under Cyprus’ double tax agreements
When it comes to the taxation of dividends under the Cypriot double tax conventions, there is one important aspect to consider and it refers to the fact that each agreement has been individually negotiated. This means that in certain countries, the payment of this tax is exempt completely, while in others partially. Also, in some countries reduced rates apply when dividend taxes need to be paid. At last, when double taxation cannot be avoided, a credit can be provided against the tax paid in the other country.
Cyprus’ taxation system is very appealing for foreign investors who have the possibility of moving here by starting a business or through the Golden Visa Scheme which implies purchasing a property.
If you want to relocate to Cyprus, our lawyers are at your service with various immigration services.
Taxation in Cyprus
According to the Cyprus tax authorities, the following taxes need to be considered in here:
- the income tax which applied to natural persons which is levied at rates ranging between 0 and 35%,
- the corporate tax which has a standard rate of 12,5%,
- the value added tax (VAT) which is applied at a standard rate of 19%,
- the special defense contribution applicable at rates ranging between 3 and 15%,
- capital gains are taxed at 20%.
Businessmen are invited to address to our law firm in Cyprus for more details referring to the Cypriot regulations on dividends.