Taxation Of Passive Income In Cyprus – The Company Advantage

Cyprus remains one of Europe's most attractive jurisdictions for individuals and businesses seeking tax efficiency, stability, and legal certainty. A key reason is its favourable regime for passive income — income derived not from active trade but from investments such as dividends, interest, and rents.

Understanding how passive income is taxed in Cyprus, and how the use of a Cyprus company can change the effective tax outcome, is essential for investors, entrepreneurs, and family offices. This article provides a practical overview of the taxation of passive income in Cyprus, the advantages of using a company, and how careful structuring can optimise returns.

Passive Income in Cyprus – The Foundations

In Cyprus, passive income is primarily governed by two distinct tax regimes:

• Income Tax / Corporate Income Tax (CIT): applies to trading or business income.
• Special Defence Contribution (SDC): applies to certain types of passive income such as dividends, interest, and rental income, but only for Cyprus tax residents who are also domiciled in Cyprus.

This dual system means that the same income may be treated differently depending on whether it is earned by a company or an individual, and whether that individual is considered domiciled in Cyprus for SDC purposes.

Taxation of Individuals

The Concept of "Non-Dom" Cyprus introduced the non-dom regime to attract high-net-worth individuals and international entrepreneurs. An individual who becomes tax resident in Cyprus but is not domiciled there is generally exempt from SDC on dividends and most interest income. This means non-dom Cyprus residents can enjoy foreign dividends and interest income free from both SDC and income tax.

Dividends Received by Individuals

• Non-dom residents: fully exempt from SDC on dividends.
• Cyprus-domiciled residents: subject to SDC at 17%.
• Non-residents: not liable to Cyprus tax on dividends.

Interest Income

• Passive interest (e.g., bank deposits) – SDC at 17% for domiciled individuals.
• Non-dom residents – fully exempt from SDC.
• Business-related interest – treated as trading income, subject to income tax.

Rental Income

• SDC at 3% on 75% of gross rent (effective 2.25%) for domiciled individuals.
• Income tax applies on net rental profits.
• Non-dom residents are exempt from SDC but pay income tax on profit.

Even with these rules, Cyprus remains more favourable than most EU jurisdictions for rental and investment income.

Taxation of Companies

Cyprus companies enjoy one of the lowest corporate income tax rates in the EU — 12.5%. The treatment of passive income depends largely on how it arises.

Interest Income Interest earned as part of normal business (e.g., lending or treasury operations) is taxed as trading income at 12.5%. Purely passive interest (e.g., from bank deposits) may be subject to SDC at 17%.

Dividend Income and the Participation Exemption Dividends received by Cyprus-resident companies are generally exempt from both CIT and SDC if:

• The company paying the dividend does not earn more than 50% of its income from passive investments; and
• The foreign tax burden on the distributing company is not substantially lower than Cyprus' rate.

Most cross-border dividends into Cyprus holding companies qualify for this exemption.

Rental Income of Companies Rental income is treated as ordinary business income subject to CIT (12.5%) after allowable expenses. SDC may also apply if profits are distributed to Cyprus-domiciled shareholders.

Deemed Dividend Distribution (DDD) If 70% of a company's profits are not distributed within two years, a deemed dividend arises, and SDC may be payable — but only if shareholders are Cyprus-resident and domiciled. Non-dom shareholders are unaffected, allowing profits to accumulate tax-free.

Withholding Tax on Outbound Payments Cyprus applies no withholding tax on:

• Dividends and interest paid to non-residents.
• Royalties for IP used outside Cyprus.

Since 2022, limited defensive measures apply for payments to EU-blacklisted or low-tax jurisdictions.

When Does Using a Cyprus Company Make the Difference?

Using a Cyprus company can improve tax outcomes depending on the type of income and the investor's profile.

Common Scenarios Include:

• Consolidation and Reinvestment: Cyprus companies can consolidate multiple income streams (dividends, interest, royalties) and reinvest them tax-efficiently.
• Financing and Treasury Operations: Income treated as business activity (12.5% CIT) instead of passive SDC (17%).
• Real Estate Investment: Companies can deduct costs, manage liability, and simplify succession or share transfers.
• Non-Dom Shareholders: No DDD applies, allowing long-term accumulation of profits tax-free.
• Governance and Banking Access: Corporate structures provide credibility and easier access to financing.

Examples of Practical Application

Example 1: Non-Dom Investor Holding Shares Anna, a non-dom Cyprus resident, receives €1 million in dividends from abroad. These are exempt from both SDC and income tax — 0% Cyprus tax.

Example 2: Private Credit Platform A family office establishes Cyprus Finance Ltd. Interest income is treated as trading income (12.5% CIT), much lower than SDC, allowing reinvestment of profits.

Example 3: Holding Company Structure A Cyprus holding company receives dividends from an EU subsidiary. The income is fully exempt under the participation exemption and can be distributed abroad without withholding tax.

Key Considerations for Structuring

To maintain Cyprus' tax benefits, substance and compliance are crucial:

• Substance: Management and control must be in Cyprus (local board meetings, decision-making, and records).
• Transfer Pricing: Intercompany transactions must be at arm's length.
• Deemed Dividend Distribution: Track the two-year period and shareholder domicile.
• Blacklisted Jurisdictions: Avoid payments to non-compliant entities.
• Future Tax Reform: A potential 15% CIT alignment won't diminish Cyprus' competitiveness.

Conclusion – When a Company Makes the Difference

Cyprus offers a unique blend of low tax rates, non-dom incentives, and legal stability. For individuals, dividends and interest may be earned tax-free. For companies, structuring can transform passive income into efficient business income.

When used strategically, a Cyprus company enables:

• Interest taxed as business income at 12.5%.
• Exempt dividends via participation exemption.
• Tax-free outbound distributions.
• Enhanced governance and succession flexibility.

A well-designed Cyprus company is not just a tax vehicle — it is a strategic tool for wealth protection, reinvestment, and cross-border efficiency.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.