The Special Defence Contribution (SDC) is a Cyprus-specific levy imposed on passive income earned by individuals who are both Cyprus tax residents and domiciled in Cyprus. The applicable rates are 17% on dividend income, 30% on interest income, and 3% on 75% of gross rental income. SDC does not apply to trading income, employment income, or capital gains, which are instead subject to income tax or capital gains tax under separate provisions.
The most significant planning opportunity created by SDC is its complete inapplicability to individuals who qualify for non-domicile status. A Cyprus tax resident who is non-domiciled under the 17-year rule pays zero SDC on any amount of dividends or interest, regardless of source. This makes the non-dom regime extremely valuable for founders and investors holding dividend-paying companies, particularly in the context of Cyprus holding structures and IP regimes.
SDC is also withheld at source by Cyprus companies on dividend distributions to Cyprus-domiciled shareholders. Employers and company administrators must identify the domicile status of each recipient before applying or exempting the withholding obligation. Failure to withhold correctly exposes the paying entity to penalties.