Special Defence Contribution (SDC)
Home / Special Defence Contribution (SDC)
What SDC is
Special Defence Contribution (SDC) is a Cyprus tax on specific types of mainly passive income, most relevant for Cyprus tax resident and Cyprus domiciled individuals. For many inbound individuals, the non-dom regime is a key factor because it can eliminate SDC on dividends and interest (subject to the regime’s conditions).
In corporate contexts, SDC is also relevant in certain dividend flows and in the historical deemed dividend distribution mechanism (see below), with important reforms effective from 1 January 2026.
Dividends
Individuals (Cyprus tax resident + domiciled):
- 5% SDC on dividends (new standard rate), but with transitional rules for “old profits”.
- Transitional rule: dividends paid out of profits earned up to 31 December 2025 remain taxed at 17% if received on or before 31 December 2031 (in-scope individuals).
Companies (Cyprus tax resident companies receiving Cyprus dividends):
- Generally exempt, with time-limited exceptions and transitional “look-back” rules still producing 17% outcomes in defined cases until 31 December 2031.
Interest
As a baseline:
- Interest received by individuals is generally subject to SDC, with different rates depending on the instrument/type (e.g., specific bonds may attract a lower rate).
- Notably, the SDC rate on (most) interest income was reduced from 30% to 17% with effect from 1 January 2024.
The 2026 reform also introduced clarity around the tax treatment of interest for companies’ vs individuals (helpful for mixed structures).
Before 2026: rental income was subject to SDC at 3% on 75% of gross rent (effective 2.25%), in addition to income tax.
From 1 January 2026: SDC on rental income is abolished. Rental income is now taxed only under Income Tax / Corporate Tax (as applicable).
Deemed Dividend Distribution
Historically, Cyprus tax resident companies were deemed to distribute a 70% portion of profits at the end of the second year following the year the profits were generated, where ultimate shareholders were Cyprus tax resident and domiciled individuals, triggering SDC.
2026 reform: DDD abolished going forward + transitional rules
From profits earned as from 1 January 2026, the DDD rules are abolished.
However, profits earned prior to 1 January 2026 remain subject to transitional DDD provisions, including specific timing rules for profits from 2024 and 2025.
Company dissolution
On dissolution, undistributed profits were historically treated as distributed and could trigger SDC. Under the 2026 reform, dissolution deemed distribution continues to apply only to the extent of profits earned prior to 31 December 2025, reflecting the transition away from DDD for 2026+ profits.
A key addition of the tax reform is the concept of disguised dividends for direct/indirect shareholders who are natural persons. A 10% SDC rate applies (double the new 5% dividend rate), designed to discourage private benefit extracted through company assets.
Examples covered include:
- private use of company assets by shareholders (or related persons); and
- transfer of company assets at a lower than fair value price to shareholders/related persons, with the taxable “dividend” measured by reference to market value mechanics.
- SDC on disguised dividends is not refundable if situations change in future years.
Outbound dividend rules to BLJ/LTJ
Separately from domestic dividend taxation, Cyprus applies special rules for dividends paid to related companies in:
- EU blacklisted jurisdictions (rate remains 17%), and
- low-tax jurisdictions (rate reduced to 5% from 1 January 2026).
Our SDC practice portfolio
We advise on SDC planning and compliance for owner-managed groups, family office structures, inbound executives (including non-dom positioning), dividend policy planning under the 2026 framework, and transitional DDD clean-up for 2024–2025 profit years.
FAQs for Special Defence Contribution (SDC)
SDC is a Cyprus tax on specified categories of mainly passive income, most relevant for Cyprus tax resident and Cyprus domiciled individuals (and certain corporate circumstances historically linked to deemed distributions).
From 2026, SDC on actual dividends received by Cyprus tax resident and domiciled individuals is 5%, with transitional rules for dividends sourced from pre-2026 profits.
Yes - DDD is abolished for profits from 2026 onwards, with transitional rules for earlier profit years.
No - SDC on rental income was abolished from 2026. Rental income remains taxed under income tax/corporate tax as applicable.
Interest received by individuals is typically treated under SDC rules depending on its nature, while companies generally tax interest under corporate income tax rules (and not SDC), subject to specific exceptions.
The reform introduces a concept that captures certain shareholder benefits/value transfers that are dividend-like in substance and taxes them accordingly under the new framework.