The Special Defence Contribution (SDC) is Cyprus's levy on passive income paid by tax-domiciled residents. Cyprus Non-Dom residents are completely exempt from SDC, paying 0% on dividends, interest, and rental income — only the 2.65% GESY levy applies to these income types. Understanding SDC is essential for any entrepreneur or investor considering Cypru
Special Defence Contribution (SDC) is paid only by Cyprus-domiciled tax residents. Non-Dom residents are entirely exempt. From 2026, the SDC rate on dividends was reduced from 17% to 5% for domiciled residents. s.
What Is the Special Defence Contribution?
SDC was introduced in Cyprus in 1984 as a levy specifically on passive income received by Cyprus-domiciled residents. It is collected alongside — but completely separate from — income tax and the GESY health levy.
SDC applies to three types of income when received by domiciled Cyprus tax residents:
- Dividends from Cypriot and foreign companies
- Interest income from deposits and loans
- Rental income (at an effective rate lower than the headline rate due to a 25% deduction)
SDC does NOT apply to:
- Employment income (salary)
- Business income (trading profit)
- Capital gains on securities
- Capital gains on property (separate tax applies)
- Any income received by Non-Dom residents
SDC Rates in 2026
The 2026 tax reform, approved December 22, 2025 and effective January 1, 2026, significantly changed SDC rates:
| Income Type | SDC Before 2026 | SDC Since Jan 2026 | Non-Dom SDC |
|---|---|---|---|
| Dividends | 17% | 5% | 0% |
| Interest | 17% | 17% (unchanged) | 0% |
| Rental income | Effective ~3% (75% of 4%) | Effective ~3% (unchanged) | 0% |
The dividend SDC rate reduction from 17% to 5% is one of the most significant changes in the 2026 reform for domiciled residents. However, it is important to note that Non-Doms already paid 0% SDC, so this reform primarily benefits those who have been Cyprus residents for 17+ years and lost Non-Dom status.
Non-Dom SDC Exemption: How It Works
If you hold valid Non-Dom status (confirmed by a TD38 certificate from the Cyprus Tax Department), you are automatically exempt from SDC on all passive income. No additional application or form is required — your Non-Dom certificate is your exemption document.
For dividends from your Cyprus company: When your company files the monthly TD603 declaration on TAXISnet:
- SDC withheld: €0 (you are Non-Dom)
- GESY withheld: 2.65% of the gross dividend
- Your company pays only the GESY amount to the Tax Department
For interest income: If you receive interest on bank deposits, the bank should withhold only GESY (2.65%), not SDC, once they have your Non-Dom status on file. Provide your bank with a copy of your Non-Dom certificate.
For rental income: If you receive rental income in Cyprus, you declare it on your personal tax return (TD1). SDC does not apply. Normal income tax (at progressive rates) may apply if your rental income, combined with other taxable income, exceeds the €22,000 threshold. GESY at 2.65% applies.
The Cost of SDC for Domiciled Residents (Why Non-Dom Matters)
To appreciate the value of the Non-Dom SDC exemption, consider what a domiciled resident pays:
Domiciled resident with €150,000 in dividends (2026 rates):
- SDC: €150,000 × 5% = €7,500
- GESY: €150,000 × 2.65% = €3,975
- Total passive income tax: €11,475
Non-Dom resident with same €150,000 in dividends:
- SDC: €0
- GESY: €150,000 × 2.65% = €3,975
- Total passive income tax: €3,975
Non-Dom annual saving on €150,000 dividends: €7,500
Over 10 years of Non-Dom status, that is a €75,000 saving on dividends alone — not counting interest and rental income.
SDC on Interest: The Hidden Benefit for Cash-Rich Founders
While the dividend exemption gets most attention, the SDC exemption on interest income is increasingly valuable as interest rates have risen.
Scenario: A Non-Dom founder holds €500,000 in a Cyprus bank earning 3.5% interest:
- Annual interest income: €17,500
- Domiciled resident SDC: €17,500 × 17% = €2,975
- Non-Dom SDC: €0
- Non-Dom GESY: €17,500 × 2.65% = €464
Non-Dom saves €2,511 per year on interest income alone. As interest rates remain elevated, this benefit is significant for founders and investors with substantial cash reserves.
Non-Dom Cyprus residents pay 0% Special Defence Contribution on interest income, compared to 17% SDC for domiciled residents — making Cyprus one of the most tax-efficient locations in Europe for holding interest-bearing deposits.
Claiming the SDC Exemption: Practical Steps
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Obtain your Non-Dom certificate: Apply with form TD38 at the Tax Department. See our guide on how to apply for Non-Dom status.
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Inform your Cyprus company: Your company's accountant or company secretary needs a copy of your Non-Dom certificate to ensure TD603 declarations are filed with €0 SDC.
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Inform your bank: Provide your bank with your Non-Dom certificate so they withhold only GESY (not SDC) on interest payments.
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Keep the certificate on file: Your auditor will reference it in your annual accounts. Store it safely.
For qualified help with Non-Dom applications and SDC compliance, visit our /directory/tax-advisors/ and /directory/accountants/ listings.
This article is for informational purposes only and does not constitute tax or legal advice. Cyprus tax rules change frequently. Always verify your specific situation with a licensed ICPAC-qualified accountant before making tax decisions. Find qualified professionals in our directory.