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Reduction of SDC for Passive Interest Income to 17%

2 minutes

We would like to inform you that the Special Contribution for the Defense (Amending) Law (Law), which was published in the Official Gazette of the Republic on 20 December 2023, introduced certain changes which are effective from 1 January 2024.

Specifically, the Cyprus Parliament voted in favour of reducing the Special Defense Contribution (SDC) from 30% to 17% for passive interest income. 

Interest income that is earned through the ordinary course of business, including interest closely connected to the ordinary course of business, is classified as active interest. 

This type of interest is treated as trading income and is subject to taxation under the Cyprus Income Tax Law, with a corporate tax rate of 12.5%. It's important to note that active interest income is not subject to the SDC.

Interest that does not fall under the category of active interest is deemed passive interest and is not subject to corporate tax. This form of interest is taxed under the SDC Law at the reduced rate of 17% on the total gross interest income. 

Implications on Investments

The reduction of the SDC rate on passive interest income from 30% to 17% while not a drastic alteration, still marks a notable adjustment in Cyprus's tax policy. This change is poised to have an impact on investment strategies and financial planning. For investors and businesses dealing with passive interest income, this reduction could lead to enhanced net returns, making such investments more attractive and potentially stimulating further investment in interest-bearing instruments. 

On the other hand, the government's revenue from SDC may see a decrease, which could have implications for public spending or fiscal balance. This adjustment also reflects a broader strategic move by Cyprus to align its tax policies with competitive international standards. 

*This publication has been prepared as a general guide and for information purposes only. It does not purport to be comprehensive or to render professional advice. Before making any decision or taking any action that may affect you and/or your business, bespoke advice should be obtained.

Michalis is a Business & Innovation Advisor at Royal Pine. He is a holder of an LL.B from the University of Essex and an LL.M from the University of Leeds.