Imposition
According to section 3(3) of the Special Contribution for the Defence of the Republic Law 117(I)/2002, as amended and effective for the tax years 2003 onwards, a company resident in the Republic, is deemed to have distributed to its shareholders in the form of dividends at the end of the period of two years from the end of the fiscal year of assessment, 70% of its profits derived in that year reduced only by the corporation tax paid or payable on such profits.

The term ‘profits’ has the meaning of accounting profits as computed according to International Accounting Standards, but after the deduction of any transfers to reserves envisaged by Law, and after adding back any losses of previous years brought forward or which concern set-off of group loss, the revaluation of movable or immovable property, the additional depreciation arising by way of revaluation and realised profits or losses credited directly to reserves.

The deemed dividend distribution is subject to Special Contribution for Defence at the rate of 15%. The company has the obligation to withhold and pay this amount on behalf of the shareholders to the Inland Revenue Department.

The provisions of Deemed Dividend Distribution do not apply to the proportion of profits attributable to shareholders who are non-tax residents of the Republic of Cyprus.

The amount of deemed dividend will be reduced by any actual dividend distributed during the period of two years from the end of the year of assessment to which the profits relate.

When an actual dividend is paid after the deemed dividend distribution, then Special Contribution for defence is imposed only on the additional dividend paid.

In the case of liquidation of a company the total profits of the past five years prior to liquidation, which have not been distributed, or which have not been deemed distributable dividends, will be deemed to be distributable on its liquidation and be subject to Special Contribution for Defence at the rate of 15%.

In the case of reduction of capital of a company and payment to the shareholders of any amounts up to the amount of undistributed chargeable income of any year, which arises before the deductions in respect of losses which are brought forward from previous years but after deducting those amounts which have been deemed distributable dividends, such amounts will be deemed distributable dividends subject to Special Contribution for Defence at the rate of 15%.