Cyprus defence contribution of 5% on dividends: who the reform affects and what to do before the end of 2026

In brief

• The Special Defence Contribution (SDC) is paid only by people who are both Cyprus tax residents and domiciled on the island. Non-doms and non-residents do not pay it at all.
• Dividends from profits earned from 1 January 2026 are taxed at 5%. Dividends from profits of 2025 and earlier are still taxed at 17%.
• The contribution on interest was not cut: 17% on deposits, 3% on EU government bonds and listed bonds.
• The contribution on rent is abolished. Deemed dividend distribution is abolished for 2026 profits but still applies to 2024 and 2025 profits.
• There is a new 10% rate on disguised profit distributions and a way to extend the non-dom exemption beyond 17 years: EUR 250,000 for each five years, at most twice.

What the defence contribution is and who pays it

The defence contribution is a tax separate from income tax. It was introduced in the early 1990s to fund defence and has since become a permanent part of the system. It is charged on three types of passive income: dividends, interest and (until the end of 2025) rent. It does not touch salary, business income or pensions, which are covered by income tax on the progressive scale.

Not every resident pays it. Under Law 117(I)/2002 a "resident" for contribution purposes is a person who is a Cyprus tax resident under the 183-day or 60-day rule and also has a domicile in Cyprus. A domicile of origin is usually acquired at birth, as a rule through the father. A person born in Moscow, Kyiv or Tel Aviv to non-Cypriot parents has no Cypriot domicile of origin.

There is a second way to acquire a domicile: by time. If you have been a Cyprus tax resident for at least 17 of the last 20 years, the law treats you as domiciled. The domicile is kept until you spend 20 years outside Cyprus tax residence. That is where the famous "17 years without tax on dividends" for non-doms comes from: it is not a separate relief but simply the period after which a person becomes liable to the contribution. How to become resident under the 60-day rule I covered in detail in the article on Cyprus tax residence.

What this means for you. If you moved to Cyprus on permanent or temporary residence and were not born a Cypriot, you are almost certainly a non-dom. The contribution reform changes nothing for you: dividends and interest are still taxed at 0%, and only the GESY healthcare contribution remains.

What changed from 1 January 2026

The Cyprus tax reform is a package of several laws passed by parliament at an extraordinary sitting on 22 December 2025. The amendments to the defence contribution law were included as a separate law. All changes apply from 1 January 2026. At the same time corporate tax rose from 12.5% to 15%, the income tax-free threshold went up to EUR 22,000, and gains on crypto-assets became taxable at 8%.

The logic of the contribution reform is clear: the state raised the tax on company profits and at the same time cut the tax on paying them out to the owner. For a domiciled resident the overall burden on the "company profit to dividend in the pocket" path went down, not up. Below are all contribution rates before and after the reform, according to the Cyprus Tax Department.

Note the two lines most often retold wrongly. The first is interest. The 17% rate on deposits stayed the same; there was no cut to 5%. The reduced 3% still applies to government bonds of Cyprus and other EU states, listed bonds and people with total income of up to EUR 12,000 a year. The second is dividends from old profits. The Ministry of Finance states plainly: 5% is withheld on dividends from profits earned after 1 January 2026, and 17% applies before that date.

Separately, the reform introduced rates for payments to companies. Dividends to a company in an EU-blacklisted jurisdiction with a link of more than 50% are taxed at 17%, and to a company in a low-tax jurisdiction at 5%. Previously Cyprus almost never withheld anything on dividends to foreign companies. If your Cypriot company is owned by an offshore holding, check this line separately; more on structures in the article on Cyprus corporate tax.

What this means for you. The 5% rate covers only new money. If the company holds undistributed profits of past years, they will go to a domiciled shareholder at 17%, even if you pay them out in 2027.

What is left in hand: the calculation

I calculated three situations for a EUR 100,000 dividend received by a Cyprus tax resident with no other income. All three include the GESY healthcare contribution of 2.65%: every resident pays it, non-doms included, on a base of no more than EUR 180,000 a year. An individual in Cyprus pays no income tax on dividends.

Domiciled resident, dividend from 2025 profits: contribution EUR 17,000 and GESY EUR 2,650, EUR 80,350 in hand. The same person, dividend from 2026 profits: contribution EUR 5,000 and GESY EUR 2,650, EUR 92,350 in hand. Non-dom: only GESY of EUR 2,650, EUR 97,350 in hand. The difference between the old and new rate for one person is EUR 12,000 on every EUR 100,000 of dividends.

Now the whole chain from company profit. To pay EUR 100,000 of dividends out of 2026 profits, the company has to earn EUR 117,647: the 15% tax will be EUR 17,647. For a domiciled owner the total burden is 17,647 + 5,000 + 2,650 = EUR 25,297, or 21.5% of profit. For a non-dom it is EUR 20,297, or 17.3%. For comparison, under the 2025 rules with 12.5% tax and a 17% contribution the same chain produced EUR 33,936 of taxes on a profit of EUR 114,286, that is 29.7%.

What this means for you. For a domiciled owner of a Cypriot company the reform pays off even with the higher profit tax. For a non-dom the burden rose by 2.5 points of profit tax but remains one of the lowest in the EU for the "company plus dividends" model.

2024 and 2025 profits: deadline 31 December 2026

The most practical part of the reform for company owners is the transition on deemed dividend distribution. Under the old rule, if a company did not pay dividends within two years after the end of the tax year, 70% of its after-tax profit was treated as paid to domiciled shareholders, and the 17% contribution was withheld on that amount. The reform abolished this rule only for profits of 2026 and later. The Tax Department states directly that the 17% rate applies to profits up to and including 2025.

This means that for 2024 profits the deemed distribution date is 31 December 2026, and for 2025 profits it is 31 December 2027. Example: a company earned EUR 200,000 after tax in 2024 and paid nothing out. On 31 December 2026 EUR 140,000 will be treated as paid, and the 17% contribution will be EUR 23,800. The company pays it on behalf of the shareholder, although he received no money. Actual dividends from 2024 profits paid before that date reduce the deemed amount.

The rule applies only to individual shareholders who are tax resident and domiciled in Cyprus. If the company owner is a non-dom or lives outside Cyprus, no deemed distribution is charged to them. That is why many of our clients with Cypriot companies have never heard of the rule: it simply did not apply to them. How the company itself and its taxes work I described in the article on company formation in Cyprus.

What this means for you. If you are a domiciled shareholder and the company holds 2024 profits, the decision has to be made before the end of 2026: pay dividends at 17% in real money or pay the same contribution on the deemed distribution. Postponing to 2027 to move onto 5% will not work.

Non-dom after 17 years: extension for EUR 250,000

The second major novelty is the alternative method of paying the contribution under Article 3D of the law. It is described in detail in the Tax Department's Circular 2/2026 of 29 May 2026. A person without a Cypriot domicile of origin who becomes domiciled under the 17-of-20-years rule may, instead of the normal contribution, pay a fixed EUR 250,000 for five years, that is EUR 50,000 a year. This can be done at most twice in a row. The non-dom exemption is thus stretched from 17 to 27 years.

The payment covers all contribution liabilities for the five-year period: dividends from any companies, Cypriot and foreign, interest, disguised profit distributions. That person's Cypriot companies are also exempt from the contribution on the deemed distribution of 2024 and 2025 profits in the part attributable to them. After payment a certificate is issued that can be shown to banks and companies so that no contribution is withheld from payments.

The conditions are strict. The application is filed no later than 30 June of the first year of the five-year period; it can be filed early, but no more than two years before the year in which the domicile arises. An example from the circular: a person became resident in 2010 and remains so up to and including 2026. In 2027 they become domiciled, and they must apply for 2027-2031 by 30 June 2027. Since filing for such a person already opened in 2025, there is no point waiting for the last day.

The money is paid in one sum by the end of the month following the month of approval. If it is not paid on time, the approval lapses, and the law does not allow paying later. The choice is irrevocable: if you leave Cyprus or do not receive the expected dividends, the EUR 250,000 is neither refunded nor credited against other taxes. The application must be accompanied by a domicile-of-origin questionnaire and clean criminal record certificates from Cyprus and the countries of citizenship, apostilled and translated into Greek. The Tax Department will refuse in the case of a criminal record, international sanctions or if it considers that approval would harm the reputation of Cyprus.

There are also groups for whom the extension is closed. Anyone who became domiciled by time in 2023 or earlier cannot apply for any period. For those who became domiciled in 2024 or 2025 the circular made an exception for 2026-2030, but the filing deadline expired on 30 June 2026. A person with a Cypriot domicile of origin cannot use the mechanism at all. More on the regime itself in the article on non-dom status in Cyprus.

What this means for you. The extension only pays off with large dividends. EUR 50,000 a year equals the 5% contribution on EUR 1,000,000 of dividends from new profits. If your passive income is lower, the normal 5% contribution will be cheaper. With interest the threshold is lower: at 17% the extension pays off from roughly EUR 294,000 of interest a year.

Interest, rent and disguised profit distributions

On interest the reform did almost nothing. A domiciled resident pays 17% on bank deposit interest and 3% on interest from government bonds of Cyprus and other EU states, local authority bonds and corporate bonds traded on a recognised exchange. A person with total annual income of up to EUR 12,000 can reclaim everything withheld above 3%. A non-dom pays no contribution on any interest.

With rent it is simpler: the contribution is abolished from 2026. Until the end of 2025 a domiciled resident paid 3% on 75% of gross rent, that is 2.25% of the whole amount. Now rental income is subject only to income tax on the scale and the GESY contribution. How this changes a flat's net yield I analysed in the article on rental yields in Cyprus.

The new 10% rate applies to disguised profit distributions, Article 3A of the law. This covers cases where a shareholder gets a benefit from the company other than as dividends: for example, uses its property for private purposes or buys an asset from it below market. The rule applies only to domiciled residents. The exact calculation criteria are best checked against the text of the law and Tax Department practice: there are still few explanations with examples on this article.

What this means for you. If you are a non-dom, neither interest, nor rent, nor disguised distributions create a defence contribution for you. But the 2.65% GESY contribution on interest and rent is paid by all tax residents.

Who the reform affects in practice

I split our clients into five typical situations. For most of those who obtain Cyprus permanent residence by investment and move to the island, the contribution reform passes them by, and the changes to income tax and profit tax matter more.

• A new resident without Cypriot roots. Non-dom, 0% contribution for 17 years. You need to file the exemption declaration on form T.D.38 so that the bank and the company do not withhold the contribution.
• A domiciled owner of a Cypriot company. New profits go out at 5%, old ones at 17%, and 2024 profits fall under the deemed distribution on 31 December 2026.
• A long-standing resident who arrived in 2009-2010. Approaching the 17-of-20 threshold. You need to work out whether the EUR 250,000 extension pays off and not miss 30 June.
• A person with a Cypriot domicile of origin, for example the child of a Cypriot father. Pays the contribution as a domiciled resident; the extension is not available.
• A non-resident of Cyprus who owns a Cypriot company. Pays no contribution but must check dividend tax in their own country and the double tax treaty.

For business owners there is one more layer. The 15% profit tax, the abolition of the deemed distribution and the 5% on dividends together change the logic of where to keep profits. Previously a company with a Cypriot owner was forced to distribute profits after two years. Now 2026 profits can stay in the company as long as needed without the contribution, which makes Cyprus more convenient for reinvestment.

What to do before the end of 2026

1. Determine your status: tax resident or not, whether you have a domicile of origin, how many of the last 20 years you were a Cyprus resident.
2. If you are a non-dom, check that form T.D.38 has been filed and that the bank and the companies paying you dividends and interest have the confirmation.
3. If you are a domiciled shareholder, pull out the company's 2024 accounts and calculate the deemed distribution as at 31 December 2026.
4. Separate pre-2026 and post-2026 profits in the company's books: this decides whether the contribution is 17% or 5%. The dividend resolution should state clearly which year's profits the payment comes from.
5. If you are approaching 17 years of residence, estimate expected dividends and interest for the next five years and compare them with EUR 250,000.
6. If you need an extension application, order apostilled and translated criminal record certificates in advance: this takes weeks.
7. If your Cypriot company is owned by a foreign company, check whether the owner's country is on the EU blacklist or is a low-tax jurisdiction.

Common mistakes

• Assuming everyone pays 5%. Non-doms and non-residents pay 0%, and 5% applies only to domiciled residents.
• Applying 5% to old profits. Dividends from 2025 and earlier profits are taxed at 17% regardless of the payment date.
• Thinking the deemed distribution is abolished completely. For 2024 and 2025 profits it applies until the end of 2026 and 2027.
• Waiting for a cut in the contribution on interest. There was none: 17% on deposits, as before.
• Forgetting GESY. The 2.65% contribution is paid by all tax residents, non-doms included, on dividends, interest and rent, within the EUR 180,000 cap.
• Applying for the extension "just in case". The money is not refunded, even if you leave Cyprus.

My conclusion

The defence contribution reform is good news above all for Cypriots and long-standing residents with their own companies: their burden on dividends fell more than threefold. For foreigners moving to Cyprus now, the main advantage remains the same: 17 years without the contribution on dividends and interest, now with an option to extend that period for a fixed sum.

I would focus on three things. First, 2024 profits in companies with Cypriot shareholders: the 31 December 2026 deadline is close. Second, separating old and new profits in the books, otherwise a bank or auditor will apply 17% where 5% is possible. Third, the non-dom extension: it only pays off with passive income of a million euros a year or more, and the decision is irrevocable. A comparison of Cyprus with other jurisdictions for dividend income is in the article on UAE and Cyprus taxes, and if you own a company in Cyprus or are only planning one, start with the page company registration in Cyprus.

How this piece was prepared

This piece is based on the Cyprus Tax Department's table of defence contribution rates (before and after the 2026 reform), the Tax Department's section on tax residence and domicile, Circular 2/2026 of 29 May 2026 on the alternative method of paying the contribution and form T.D.631, the Ministry of Finance section on tax incentives, and the report of the Cypriot state broadcaster on parliament passing the reform on 22 December 2025. The calculations are mine and do not take into account personal deductions or other income. It is not tax advice on a specific situation.