Passive income taxation – An update

With the comprehensive tax reform enacted at the end of 2025, the taxation of passive income in Cyprus has been reshaped in a much more structural way than in previous years. The reform decouples the treatment of individuals from that of companies, abolishes deemed dividend distribution on new profits, removes the parallel Special Defence Contribution layer on rental income, and at the same time broadens the legal concept of ‘dividend’ and tightens anti‑avoidance rules on distributions and low‑tax structures.

INTEREST INCOME

The tax reform introduced by the Cyprus Government in December 2025 fundamentally changed the treatment of interest income by segregating company treatment from individual treatment.

Interest received by individuals who are tax resident in Cyprus from savings certificates and development bonds of the Republic of Cyprus, corporate bonds listed on a recognised stock exchange, as well as or bonds listed on a recognised stock exchange that are issued by a local authority or a state organisation, or from an approved provident fund or social insurance fund, continue to be subject to the Special Defence Contribution (“SDC”) reduced rate of 3%.

For Cyprus tax resident companies, such interest income is subject to income tax at 15% on net profits, except for eligible religious, charitable or educational institutions of a public nature whose interest income is exempt from income tax and remains subject to SDC at 17% or 3% for the specific securities mentioned above.

It is noteworthy that only Cyprus tax resident persons (natural or legal)* are subject to SDC whilst non Cyprus tax residents enjoy a tax exemption, subject to section 3(2)(b) of the SDC law, providing that a non-resident company which is tax resident in another jurisdiction, which is included in Annex I of the EU list of non-cooperative jurisdictions for tax purposes – the “EU Blacklist”, is not exempted and is subject to SDC in Cyprus. Individuals also should be domiciled in Cyprus in order to be subject to SDC. **

Following the 2025 tax reform, interest accruing to individuals is taxed exclusively under the SDC Law, and exempt from income tax, whereas, interest accruing to companies is taxed exclusively under the Income Tax Law and is no longer subject to SDC, save for specific exempt institutions.

Cyprus tax residents are taxed on their worldwide income. For individuals, passive interest income, including interest earned on deposits in foreign banks, falls under the SDC regime and is exempt from income tax, with any foreign withholding tax being creditable against SDC liability in Cyprus. By contrast, interest income of Cyprus tax resident companies is now taxed solely under the Income tax law and is exempt from SDC.

Passive interest income of individuals is also subject to the General Health System (“GHS” – in Greek: Γενικό Σχέδιο Υγείας – ΓεΣΥ) contribution at the rate of 2,65%. This is a tax which is contributed to the national health system, which aims at providing the people of Cyprus with access to the state’s health care system. GHS contributions are capped at annual income of EUR180 000. Individuals who are non-domiciled in Cyprus are not exempt from GHS contributions.

While interest income is not subject to income tax (subject to interest income incurred due to ordinary course of business or closely linked to the ordinary business of an individual), other passive income may be subject to income tax.

RENTAL INCOME

Rental income is no longer subject to SDC. As of 1 January 2026, rental income is now subject only to personal income tax for individuals or corporation tax at 15% for companies. If the landlord is an individual, rental income is also subject to GHS contribution at the rate of 2,65%.

Non-Cyprus tax residents are subject to GHS contributions only in case they receive rental income from properties situated in Cyprus. Such rental income is subject to income tax in Cyprus but not to SDC.

Rental income from self-catering accommodation that is rented out via online platforms will be treated, subject to certain conditions, as business income and therefore subject to income tax.

DIVIDENDS

Dividends are not subject to income tax but they are subject to SDC – withholding tax of 5% (reduced from 17% as of 1 January 2026) when received by Cyprus tax resident and domiciled individuals. Dividends received from Cyprus tax resident companies out of profits earned up to 31 December 2025 remain taxed at the old rate of 17% if the dividend is received on or before 31 December 2031.

Non Cyprus tax residents enjoy a full exemption unless they are based in jurisdictions included in the EU Blacklist (subject to 17% SDC) or low tax jurisdictions (subject to 5%, as of 1 January 2026, reduced from 17%).

Dividends received by Cyprus tax resident companies from foreign entities are not subject to SDC unless the Passive Dividend Rule applies, in which case SDC at the rate of 5% (reduced from 17%) applies if (i) the company distributing the dividend engages directly or indirectly in more than 50% of activities leading to investment income; and (ii) the foreign tax burden on the income of the paying company is substantially lower (less than 50% of the Cyprus tax burden, i.e. less than 7.5%) than the Cyprus tax.

Dividends received by a company resident in Cyprus from another company resident in Cyprus remain generally exempt from taxation. However, exceptions apply whereby SDC at 17% is payable on dividends:

• received in 2026, if paid out of profits from the years ended 31 December 2024 or 2025;
• received in 2027, if paid out of profits from the year ended 31 December 2025;
• received indirectly more than four years from the end of the tax year in which the profits from which the dividend derives were earned, where the dividend is received until 31 December 2031 and derives from profits earned until 31 December 2025.

These exceptions do not apply if the dividend receiving company is directly or indirectly owned by non-Cyprus tax residents or Cyprus tax resident non-domiciled individuals, in which case the dividends remain exempt.

Dividends received by a Cyprus resident company or a company not resident in Cyprus but which maintains a permanent establishment in Cyprus from a company which is not resident in Cyprus, are also exempt (subject to certain exceptions).

GHS contribution of 2,65% is also paid on dividend income received by Cyprus tax resident individuals.

The tax reform has significantly widened the concept of ‘dividend’ for SDC purposes to include distributions beyond traditional dividend payments. Thus, company assets distributed to shareholders upon a capital reduction, dissolution or liquidation will be treated as dividends; and so will increases in a company’s issued capital by capitalisation of distributable reserves.

The tax reform introduces the concept of ‘disguised dividends’ for direct and indirect shareholders who are natural persons, subject to SDC at 10% (double the normal 5% rate). Disguised dividends arise in two situations:

• When a shareholder (or related individual) uses a company asset for private purposes;
• When a company disposes of an asset to an individual shareholder (or related individual) at below fair market value.

The deemed dividend distribution rules have been abolished for profits earned as from 1 January 2026 onwards by Cyprus tax resident companies. There are transitional provisions applicable to profits earned in tax years 2024 and 2025.

ROYALTIES

Royalties earned on rights used within Cyprus are subject to withholding tax of 10%, except royalties relating to cinematographic films, where the withholding tax rate is 5%. Literary, dramatic or artistic work (excluding motion picture films and works on film or videotape for use in connection with television) are tax exempt. As with dividends, royalties earned by non residents of Cyprus, are also exempt from tax.

Cyprus provides credit for any foreign tax paid irrespective of the existence of a treaty for the avoidance of double that Cyprus signed with other countries.

For the purposes of the Cyprus Income Tax Law, an individual is considered tax resident in Cyprus if (a) he/she is physically present in Cyprus for more than 183 days in any one calendar year, or (b) he/she is physically present in Cyprus for at least 60 days in the relevant tax year, does not reside in any other state for more than 183 days in aggregate during that year, carries on a business and/or is employed in Cyprus and/or holds an office in a Cyprus tax resident company which hαs not terminated during the same year and maintains in Cyprus a permanent residential property which is owned or rented. To be noted that the 60day rule has been amended by removing the requirement for an individual ‘not to be considered tax resident in any other state’.

**For the purposes of the Special Contribution for the Defence Law, an individual is considered domiciled in Cyprus through a domicile of origin (acquired at birth) or a domicile of choice by establishing permanent residence in Cyprus with the intention of permanent stay. An individual who has been tax resident in Cyprus at least 17 out of the 20 years immediately prior to the relevant tax year is also deemed to be domiciled in Cyprus. Once the Cyprus domicile is acquired for SDC purposes, it is retained unless the person remains non-tax resident of Cyprus for an uninterrupted period of 20 years. In certain cases where the individual’s non-dom status is based on having a domicile of origin outside Cyprus, the exclusion from SDC can be extended for up to tow five-year periods on payment of a EUR250k fee per five-year period.

Disclaimer – The contents of this article are provided for general information purposes and do not constitute legal or other professional advice or an opinion of any kind. Persons interested in the subject matter are advised to seek specific legal advice for each particular case.