The Special Defence Contribution (SDC) is a Cyprus tax on passive income — dividends, interest and, until recently, rents. Its defining feature is who it applies to: only individuals who are both tax resident in Cyprus and domiciled here pay it. Cyprus tax residents who are not domiciled — the typical relocating expatriate or investor under the non-dom regime — are exempt from SDC entirely, which is the single most powerful element of Cyprus's appeal to international individuals.
The 2026 reform reshaped SDC significantly: the rate on dividends was cut from 17% to 5%, SDC on rental income was abolished, and the deemed dividend distribution rules were wound down to a transitional measure. This guide explains who pays SDC, the 2026 rates on each type of income, the deemed distribution changes, and how SDC interacts with the GHS contribution that everyone pays.
Who pays SDC — and who does not
SDC is charged only on individuals (and, for some categories, companies) that are Cyprus tax resident and domiciled in Cyprus. The two conditions are cumulative, so missing either one removes the charge:
- A non-resident pays no SDC on Cyprus-source dividends or interest.
- A resident non-dom pays no SDC, because they fail the domicile test.
- A resident and domiciled individual pays SDC at the rates below.
An individual is domiciled in Cyprus for SDC purposes either by domicile of origin under Cyprus law, or by being "deemed domiciled" — having been Cyprus tax resident for at least 17 of the last 20 years. Until that 17-year point is reached, a relocating individual is a non-dom and is exempt from SDC. See our non-dom guide and residency guide.
SDC on dividends: cut to 5%
The headline 2026 change is the reduction of SDC on dividends from 17% to 5%. The detail matters: the 5% rate applies to dividends paid out of profits arising on or after 1 January 2026. Dividends distributed from older profits (those of 2024 and 2025) remain subject to the 17% rate transitionally. So in 2026 and the next few years a company may distribute dividends carrying different SDC rates depending on which year's profits they come from.
A resident-and-domiciled shareholder receives a €100,000 dividend paid out of 2026 profits. SDC at 5% is €5,000, plus GHS at 2.65% of €2,650 (within the cap) — a combined €7,650. A non-dom shareholder receiving the same dividend pays no SDC — only the €2,650 GHS. The gap between the two is exactly what makes the non-dom regime so valuable.
SDC on interest
For resident-and-domiciled individuals, SDC on most passive interest income is 17%. A reduced rate of 3% applies to specific categories — interest on Cyprus and other EU government bonds and savings certificates, and interest credited to pension funds, provident funds, the Social Insurance Fund and the Health Fund.
An important reform point: interest earned by companies in the ordinary course (or closely connected to it) is now subject to corporate income tax rather than SDC. SDC on interest is therefore essentially an individual-level tax on passive interest. Active business interest is taxed under the corporate rules instead.
SDC on rents: abolished
Before the reform, rental income suffered SDC at 3% on 75% of the gross rent, in addition to income tax. The 2026 reform abolished SDC on rental income altogether. Rents are now taxed only under the normal income tax bands (with the related expenses and wear-and-tear allowances), plus GHS at 2.65%. This simplifies the taxation of property income and modestly reduces the burden on resident-and-domiciled landlords.
| Income type | SDC (resident & domiciled) | Non-dom |
|---|---|---|
| Dividends (2026 profits) | 5% | Exempt |
| Dividends (2024–2025 profits) | 17% (transitional) | Exempt |
| Interest (general) | 17% | Exempt |
| Interest (government bonds / funds) | 3% | Exempt |
| Rental income | Abolished (0%) | Exempt |
Deemed dividend distribution: now transitional
The deemed dividend distribution (DDD) rules historically required that 70% of a company's after-tax accounting profits, if not actually distributed within two years, be treated as distributed — triggering SDC for resident-and-domiciled shareholders even without a real dividend. This stopped owners from indefinitely rolling up profits inside a company to defer SDC.
The 2026 reform abolished DDD for profits arising from 1 January 2026 onward. However, a transitional DDD still applies to undistributed profits of 2024 and 2025: 17% on 70% of those profits if they are not distributed within the two-year window (broadly by end-2026 for 2024 profits and end-2027 for 2025 profits). So for the next couple of years DDD remains live for older profits — plan distributions accordingly.
GHS applies to everyone
While SDC spares non-doms, the General Healthcare System (GHS) contribution does not. GHS at 2.65% applies to dividends, interest and rental income of all Cyprus tax residents, domiciled or not. The relief is the cap: total income subject to GHS is limited to €180,000 a year, so the maximum annual GHS across all income is about €4,770. For a non-dom living on substantial dividend income, that capped GHS is often the only Cyprus tax on their investment income — an exceptionally light outcome.
Using SDC to your advantage
SDC is where the Cyprus regime is most generous to international individuals: structure your residence as a non-dom and your dividends and interest escape SDC entirely, leaving only the capped GHS. Even for resident-and-domiciled owners, the cut in dividend SDC to 5%, the abolition of rental SDC, and the winding-down of DDD make 2026 a materially lighter year — provided distributions are timed correctly against the transitional rules.
Getting the domicile analysis, the dividend timing and the DDD transition right is exactly the kind of planning that pays for itself. Speak to our team — our individuals and non-dom service and tax advisory will position your income to minimise SDC lawfully and keep the filings clean.