Interest income from whatever source, whether from Cyprus or outside Cyprus, and subject to the provisions explained below, earned by a tax resident corporation is in general subject to special contribution for defence at the rate of 30% applied on the gross amount and exempt from 12.5% corporation tax.
It should be noted, however, that interest derived from the ordinary carrying on of a business, including interest closely connected with the ordinary carrying on of a business, is not treated as interest but as a business profit and is, therefore, not subject to special contribution for defence. Such interest is fully subject to corporation tax at the rate of 12,5%.
A tax credit is available for any taxes withheld abroad on the interest income against the Cypriot corporate income tax or the special contribution for defence.
Dividends are exempt from 12.5% corporation tax.
Dividends received by a Cyprus tax resident company from another Cyprus tax resident company are also exempt from 20% special contribution for defence.
Dividends received by a Cyprus tax resident company, or by a permanent establishment in Cyprus of a non-Cyprus tax resident company, from a non-Cyprus tax resident company are exempt from 20% special contribution for defence unless the non-Cyprus tax resident company paying the dividend:
- engages, directly or indirectly, more than 50% in activities which lead to investment income; and
- the foreign tax burden on the income of the company paying the dividend is substantially lower than the tax burden of the company in Cyprus. "Substantially lower" is interpreted to mean suffering an effective tax rate lower than 5% (i.e. lower than half of the Cypriot corporate income tax rate).
The rate of special contribution for defence is decreased from the normal rate of 20% to 3% when the dividends are received from Open-end Investment Funds and Closed-end Investments Funds which are incorporated in Cyprus and regulated under the Cyprus Investment Fund Law.
In cases where the dividends are not exempt, tax credit for any taxes withheld abroad on the dividends are available against the 20% special contribution for defence. In addition, where dividends are received from companies resident in other EU Member States, tax credit is also available for the underlying taxes payable by the EU company paying the dividend as well as by any lower tier subsidiaries out of which the dividends originally emanated.