Governments have the right to impose any tax they wish. Cyprus, for instance, has a 15 percent defense tax. This levy is due on June 30 and December 31 each year. Defense tax is imposed on certain income earned by Cyprus residents and resident companies. However, this article explains payments and exemptions relevant to resident companies and non-resident companies with business dealings in Cyprus.

Who pays and who is exempt?

Residents of Cyprus who receive dividends from a Cyprus company, or a company abroad, are subject to the Cyprus defense tax. Non residents, however, do not pay defense taxes on their gross dividends.

Resident companies are exempt from paying defense tax in these situations:

• A Cyprus company that receives dividends from another resident company will not have to pay defense tax on these gains.
• A Cyprus company that receives gains from a non-resident company won't pay defense tax on these dividends.

However, the above exemptions do not apply if the company paying the dividend engages more than 50 percent directly or indirectly in business involving investment income, and the foreign tax on the income of the company paying the dividend is much lower than that of the Cyprus resident company. As a general rule of thumb, a "much lower" foreign tax is less than 5 percent.

Non-resident companies

A Cyprus company making a dividend payment to a non-resident company will not have defense tax deducted. Meanwhile, the non-resident company receiving dividends from the Cyprus resident company is also exempt from paying special contribution.

Tax on interest

Cyprus companies that receive interest payments from other Cyprus companies, as well as abroad, are taxed at 15 percent of the gross amount. However, corporations that receive interest from ordinary business, such as interest earned by banks, finance companies and hire purchase companies, are not subject to defense tax but rather to corporate income tax. Additionally, a resident company does not pay defense tax on interest derived from debtors' late payment, credit extensions, etc. Defense tax is not payable on interest payments to non residents.