Savva & Associates Cyprus

Reduction in Special Defence on interest

Cyprus’s Tax Update 2024: What You Need to Know About Interest Income Taxation

Introduction to Recent Changes

Interest rates have seen a notable increase in recent years, leading to a renewed focus on the tax implications of interest income. Particularly in Cyprus, these changes have become a point of discussion for savers and investors alike. The Government of Cyprus has introduced significant amendments to the taxation of passive interest income, effective 1 January 2024, which warrant a closer look.

Key Tax Rate Adjustments

Reduction in Special Defence Contribution (SDC) Tax Rate

  • Previous Rate: The SDC tax on interest income was previously pegged at 30%.
  • New Rate: As of 1 January 2024, this rate has been reduced to 17%.

Specific Exemptions and Lower Rates

  • Special Cases: Interest earned by Cyprus tax resident domiciled individuals from specific sources such as savings certificates and development bonds of the Republic of Cyprus, corporate bonds on recognized stock exchanges, and funds from approved provident or social insurance funds are taxed at a reduced SDC rate of 3%.

Tax Implications for Cyprus Tax Residents

Scope of Taxation

  • Worldwide Income: Cyprus tax residents are subject to SDC on worldwide passive interest income.
  • Credit for Foreign Tax: Any tax withheld, for example, by foreign banks, is credited against the SDC liability in Cyprus.

Criteria for Taxation

  • Residents vs. Non-Residents: Only Cyprus tax residents are subject to SDC, with non-residents enjoying a tax exemption, subject to specific conditions.
  • EU Blacklist Consideration: Non-resident companies in jurisdictions on the EU Black list are not exempt and are subject to SDC.

Domicile Requirement

  • Individual Consideration: For individuals, domicile in Cyprus is also a requirement to be subject to SDC.

Additional Considerations

General Health System (GHS) Contributions

  • Rate and Coverage: Passive interest income is subject to a 2.65% GHS contribution, funding Cyprus’ national healthcare system.
  • Income Cap: GHS contributions are capped at the annual worldwide income of EUR 180,000.
  • Non-Domiciled Individuals: Non-domiciled individuals in Cyprus are not exempt from GHS contributions.

Differentiation from Income Tax

  • Exemption: Interest income is not subject to income tax, unless incurred due to ordinary business activities.

Conclusion: A Closer Look for Savers and Investors

The recent changes in Cyprus’s tax laws present both opportunities and complexities for individuals and legal entities dealing with passive interest income. It’s crucial for savers and investors, especially those with global financial interests, to understand these changes to optimize their tax positions.

 

For comprehensive insights and guidance, we invite you to reach out to our team at:

Charles Savva
Managing Director

BA, MBA, TEP, CA

[email protected]

+357 22516671

Mina Pieri
Senior Manager

FCCA, MBA

[email protected]

+357 22510207

Christos Tsaousis
Senior Manager

FCCA, BSC

[email protected]

+357 22510206

We look forward to addressing your questions and providing the necessary guidance for your business needs.

https://www.savvacyprus.com/