70% of Your 2024 Profits Become a 17% Dividend on 31 December 2026

Cyprus cut the Special Contribution for Defence on dividends from 17% to 5%. That figure has travelled a long way since the reform was published, usually without the sentence that belongs after it. The reform did not sweep the old rate away. It preserved it for old profits and attached dates to the preservation. The nearest of those dates is 31 December 2026, now a matter of weeks away, and on that date 70% of a company's 2024 accounting profits can become a dividend at 17% whether or not anybody declares one.

What the reform actually did

The reform laws were voted on 22 December 2025, published in the Government Gazette on 31 December 2025, and apply to tax years commencing 1 January 2026. Four changes matter for the owner-managed company. Corporate income tax rose from 12.5% to 15%. The Special Contribution for Defence on dividends received by Cyprus tax resident and domiciled individuals fell to 5%. The deemed dividend distribution rules, which for two decades forced a notional distribution out of undistributed profits, were abolished for profits earned from 1 January 2026 onwards. And a new concept of disguised dividends was introduced, charged at 10%, double the ordinary dividend rate.

Taken together the changes are favourable. The difficulty is that three of them operate by reference to the year in which the profit arose, not the year in which the cash leaves the company.

The rate follows the profit year, not the payment date

The 5% rate applies to dividends distributed out of profits arising from 1 January 2026 onwards. Dividends out of profits arising up to 31 December 2025 remain subject to the contribution at 17% where received on or before 31 December 2031; KPMG's analysis reads the legislation as reducing that rate to 5% for distributions made after that date.

Two dividends paid by the same company on the same day, to the same shareholder, out of two different reserves, therefore carry two different rates. Which reserve a dividend comes out of has become a tax decision, which means the dividend resolution and the accounting records now have to say so. A single undifferentiated retained earnings figure is no longer sufficient.

Source: KPMG Cyprus, The Cyprus Tax Reform, February 2026. Rates shown are the Special Contribution for Defence only. General Healthcare System contributions are a separate matter.

The 31 December 2026 date, and why it is the urgent one

Abolition of the deemed dividend distribution rules was not retrospective. Transitional provisions keep them alive for two years of profits. The Special Contribution for Defence applies at 17% on 70% of the accounting profits of tax years 2024 and 2025 where those profits are not distributed as a dividend within a two-year period, which produces a deemed distribution date of 31 December 2026 for 2024 profits and 31 December 2027 for 2025 profits.

Two points soften it, and one does not. Actual dividends already paid out of the relevant profits reduce the amount treated as deemed distributed, and amounts already subjected to the Special Contribution for Defence reduce what is charged on any later dividend, so the same profit is not taxed twice. The rate is not softened. Distributing 2024 profits before the year end does not move them to 5%; they are pre-2026 profits either way. It changes control over timing, and removes the risk of an unbudgeted charge arriving at a company that has since spent the money. Note also that the deemed distribution date and the date the resulting tax must be declared and paid are not the same thing.

Waiting for 2032 is a position, not a plan

If the 17% rate falls away for distributions made after 31 December 2031, sitting on pre-2026 reserves until then looks like a saving of twelve percentage points. For 2024 and 2025 profits that option is largely closed, because the transitional deemed distribution applies the charge with or without a dividend. For older reserves outside the deemed distribution net the calculation is real, but it assumes a great deal: that the shareholder is still Cyprus tax resident and domiciled in 2032, that the company is still solvent and still holds the cash, and that the legislation has not moved again in six years. Refunds, meanwhile, are narrow. No refund is available for the contribution imposed under the transitional measures, save for a person who is not a Cyprus tax resident and who later receives a dividend out of profits already deemed distributed, who may claim the amount corresponding to shares held on 31 December 2025.

Winding the company up is not the way round it either. Liquidation proceeds attract the contribution at 17% to the extent of profits earned by 31 December 2025, and assets distributed on a capital reduction, dissolution or liquidation are treated as distributed at market value, with the excess over the capital paid up, reduced by any capital gains tax paid, treated as a dividend.

Who is actually exposed

The Special Contribution for Defence on dividends reaches individuals who are both Cyprus tax resident and domiciled. No contribution is imposed on a dividend that corresponds, directly or indirectly, to an individual who at the date of payment was not tax resident and domiciled in Cyprus. For a company with a mixed register, one dividend produces several different answers, and the register has to be read before the resolution is signed rather than after.

Two adjacent provisions deserve attention in the same review. The new disguised dividend charge of 10% applies to direct and indirect individual shareholders on the market value of company assets put to personal use, and on the shortfall where company assets are sold to a shareholder below market value. Separately, the 9% deemed benefit on receivables from shareholders and directors has been extended to indirect shareholders.

What to check before the year end

• Split retained earnings by the year in which the profit arose, inside the accounting records rather than in a spreadsheet nobody will find in 2031.
• Identify the accounting profits of 2024 and 2025 and what has been distributed out of each.
• Quantify 17% on 70% of the 2024 figure, net of dividends already paid from it, and decide deliberately whether to distribute before 31 December 2026.
• Establish each shareholder's residence and domicile position, including indirect individual shareholders.
• Review shareholder current accounts, company cars and company property in personal use against the disguised dividend charge and the deemed interest benefit.
• Make every future dividend resolution state which year's profits are being distributed.

For profits earned from 2026, Cyprus is a materially cheaper place to take money out of a company than it was. For profits earned before that, the reform did not reduce the cost; it put a clock on it and left a 17% charge running in the meantime. The companies that get caught will not be the aggressive ones. They will be the ones whose reserves have never needed splitting by year.

How we can help

CYAUSE Audit Services analyses retained earnings by profit year, quantifies the transitional deemed distribution exposure on 2024 and 2025 profits, models the cost of distributing now against holding reserves to 2032, reviews shareholder registers for residence and domicile status, and prepares and files the related Special Contribution for Defence declarations. Where shareholder balances, company cars or company property in personal use are involved, we assess them against the disguised dividend and deemed benefit provisions before they become an assessment.

This article is for general information only. It is not investment, tax, legal or audit advice, and no action should be taken on the basis of it without specific professional guidance on your own circumstances. Interested parties are welcome to enquire at enquiries@cyprusaccountants.com.cy or on +357 22 336 309.

About Us

CYAUSE Audit Services works on the questions this article raises every week: preparing and auditing the statutory accounts in which retained earnings have to be split by profit year, calculating and filing deemed dividend distribution and Special Contribution for Defence declarations, advising owner-managed companies on dividend timing and documentation, reviewing shareholder current accounts and benefits provided to shareholders, and handling the Cyprus corporate tax compliance and tax residency and domicile analysis that sits underneath all of it. We act for Cyprus companies owned by resident and non-resident shareholders alike, and we prepare the distribution records that the transitional rules now make necessary.

CYAUSE Audit Services is an Audit & Assurance firm with offices in Cyprus and the UAE. During 2015 we have been awarded by I.C.P.A.C and the A.C.C.A (local and international association of Chartered Certified Accountants) for the Quality of our Audit Services and our Office's Procedures.

Being a Truly International Audit & Assurance firm, we have associates from all over the world and we are constantly looking for new associates to expand our network further. At present, CYAUSE Audit Services operates internationally through its membership with BKR International amongst the largest American associations in the world, Accace Circle, a co-created business community of like-minded BPO providers and advisors who deliver outstanding services with elevated customer experience. Our network covers almost 40 jurisdictions with over 2,000 professionals, it supports more than 10,000 customers, mostly mid-size and international Fortune 500 companies from various sectors, and processes at least 170,000 payslips globally.

CYAUSE Audit Services Ltd is also a member of BKR International one of the biggest US Accounting Associations of the word and the 3E Accounting Network, an international accounting network which originates from Hong Kong and has more than 80 members from all over the world.

Contact Us

If you would like us to assist you with an analysis of your retained earnings by profit year, the transitional deemed dividend distribution calculation for 2024 and 2025 profits, Special Contribution for Defence declarations, dividend planning and documentation, or Cyprus corporate tax and audit compliance, please contact us at enquiries@cyprusaccountants.com.cy or call us at +357 22 336 309.

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