Dividend distribution tax affects differently the shareholders depending on whether they are Cyprus nationals, physical or legal persons. Timing of the dividend distribution also plays a major role on the actual taxes paid.
Scenario: 2018-2020 Dividend Tax Obligation Background
- Year: 2018
- After-Tax Profits: €100,000
- Dividends Distributed: None
- Profits Available for Dividend Distribution: €100,000
Dividend Tax Rule
In Cyprus, if you do not distribute dividends within two years of earning profits, you are obliged to pay a Special Defence Contribution (SDC) on 70% of those profits. This rule applies to Cyprus tax residents who are also domiciled in Cyprus. On the other handside, there is no dividend tax on non Cyprus tax residents or Cyprus tax residents and non domiciled persons.
Calculation
1. Profits Available for Dividend Distribution: €100,000
2. Percentage Subject to SDC: 70%
- 100,000 * 70% = €70,000
3. Applicable Dividend Tax Rate: 17%
- 70,000 * 17% = €11,900
Thus, by 2020, you would be required to pay €11,900 in dividend tax on the undistributed profits from 2018.
Example Breakdown
Let's break it down step-by-step for clarity:
- In 2018, your company made €100,000 in after-tax profits.
- You chose not to distribute any dividends from these profits.
- According to Cyprus tax law, by 2020, you are required to pay 17% tax on 70% of the retained profits.
- This results in a tax obligation of €11,900.
Implications
This rule means that even if you do not withdraw your profits as dividends, you will still need to pay the dividend tax on a significant portion of those profits after two years. Essentially, you are taxed on the retained earnings as if they were distributed dividends.
Who is Affected?
This tax rule primarily affects:
- Cyprus tax residents who are also domiciled in Cyprus.
- Shareholders receiving dividends from Cyprus companies while being physically present in Cyprus.
Who is Exempt?
- Non-domiciled individuals in Cyprus.
- Shareholders not physically present in Cyprus or not Cyprus tax residents.
- These groups are not required to pay the Special Defence Contribution on dividends.
Key Takeaways
1. Timely Dividend Distribution: To enjoy the 17% tax on 70% of retained profits, consider distributing dividends after two years of earning them (its like gaining a 30% off dividend tax!)
2. Strategic Tax Planning: Consult with tax experts to develop strategies that optimize your tax obligations while complying with Cyprus tax laws.
3. Professional Guidance: Our team at CYAUSE Audit Services is here to help you navigate these complex tax regulations. We provide detailed tax planning and advice to ensure you make informed decisions.
Conclusion
Understanding the nuances of dividend tax obligations in Cyprus is crucial for business owners and shareholders. At CYAUSE Audit Services Ltd, we are dedicated to providing you with the clarity and support
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.
