Recent amendments to Cyprus’s tax laws have sparked discussions among savers and investors due to the increased interest rates and their implications on interest income taxation. The government of Cyprus has implemented significant changes, effective from 1st of January 2024, affecting the taxation of passive interest income. These changes warrant a detailed examination.

One notable adjustment is the reduction in the Special Defence Contribution (SDC) tax rate on interest income. Previously set at 30%, it has now been lowered to 17%. However, certain exemptions and lower rates apply to specific cases.

For instance, Cyprus tax residents earning interest from sources like savings certificates, development bonds of the Republic of Cyprus, corporate bonds on recognized stock exchanges, and approved provident or social insurance funds are subject to a reduced SDC rate of 3%.

For Cyprus tax residents, worldwide passive interest income is subject to SDC, with any foreign tax withheld credited against the SDC liability. Only residents are liable for SDC, while non-residents enjoy exemptions under certain conditions, except for non-resident companies in EU blacklist jurisdictions.

Individuals must be domiciled in Cyprus to be subject to SDC, and they are also subject to a 2.65% General Health System (GHS) contribution on passive interest income. However, GHS contributions are capped at EUR 180,000 of annual worldwide income, and non-domiciled individuals are not exempt.

Interest income is exempt from income tax unless generated from ordinary business activities, differentiating it from other forms of income.

The recent alterations to tax laws in Cyprus present a mix of advantages and challenges for individuals and organizations involved in passive interest income. It’s crucial for savers and investors, particularly those with global financial engagements, to thoroughly grasp these modifications in order to enhance their tax strategies.