Special contribution for defence is imposed on interest, dividend and rental income of Cyprus tax resident individuals and companies it is also levied on the profits of public corporate bodies.

Exempt persons :

1. Non-Cyprus tax resident companies (have the option to get registered) and

2. Individuals international business companies that opt to be taxed at the rate of 4,25% for the years 2003, 2004 and 2005

Special contribution for defence rates

Type of income Rate Note Interest income from sources within the Republic of Cyprus 10 1 Interest income from sources outside the Republic of Cyprus 10   Interest income arising from or closely related to the ordinary carrying on of a business Nil   Interest income of individuals from deposits with the Housing Finance Corporation and from development bonds and saving certificates 3   Interest income of approved provident funds 3   Rental income (reduced by 25%) 3

Type of income Rate Note Dividend income of Cyprus tax resident companies Nil 2 & 3 Dividend income of Cyprus tax resident individuals 15 3 Dividend declared from profits net of 20% withholding tax Nil 4 Profits of public corporate bodies  3   Dividend income of non-Cyprus residents Nil

Notes

1. Individuals whose total income including interest does not exceed CY£7000 are entitled to a refund of 7%

2. In the case of a dividend received from a non Cyprus tax resident company the exemption does not apply if :

3. the company receiving the dividend owns less than 1 % of the share capital of the company paying the dividend

4. the paying company engages directly or indirectly more than 50% in activities which result in investment income, and the foreign tax burden is significantly lower than the Cyprus tax burden

5. When the exemption does not apply, the dividend income is subject to special contribution for defence at 15%

6. Foreign tax paid can be credited against the special contribution for defence liability

7. This applies to dividends declared after 31 December 2002 and paid out of the dividend income of a company which has suffered 20% withholding tax, provided such dividend is declared within six years from the date of receipt by the company

Deemed dividend distribution

If a Cyprus tax resident company does not distribute by way of dividend at least 70% of its accounting profits realized since 1st of January 2003, within two years from the end of the year of assessment, the company is deemed to have distributed such profits and is liable to pay 15% special contribution for defence on the deemed dividends attributable to its shareholders who are Cyprus tax residents

The deemed distribution is reduced by the amount of any actual dividend declared and paid during the two year period from the profits of the relevant year

Actual dividends paid after the deemed distribution are subject to special contribution for defence only on the additional dividends paid

A non-Cyprus tax resident receiving a dividend emanating from profits which at any stage were subject to deemed distribution, is eligible to a refund of the special defence contribution paid because of the deemed distribution