Passive income taxation – an update

Transcript

Speaker 1:Hello and welcome back to another episode of AGP Law’s podcast Series Deep Dive. This episode is based on the insights of our partner Lia Iordanou Theodoulou. Today we're discussing the updates to Passive Income Taxation, a topic that has attracted significant attention following the latest tax reform proposals in Cyprus.

Speaker 2:This is certainly a timely topic. The proposed changes to the taxation of passive income could have important implications for individuals, investors, and business owners alike.

Speaker 1:Absolutely. There’s been a lot of discussion around how dividends, interest, and rental income may be affected. So, to set the scene, could you walk us through what’s changing and why these developments matter?

Speaker 2:Of course. The proposals form part of the broader tax reform package and aim to modernise Cyprus’ tax framework. While the details are still being considered, the changes could reshape how certain types of passive income are taxed, making this an important area for taxpayers to understand.

Speaker 1:It is a massive shift. The 2025 reform has essentially acted as a structural reset for passive income. The core change is the decoupling of individuals from companies. For years, we dealt with a somewhat intertwined system, but now, the law treats these entities as distinct players. We have seen the abolition of deemed dividend distributions on new profits, the removal of that complex parallel Special Defence Contribution layer on rental income, and simultaneously, a much tighter, more rigorous approach to anti-avoidance and the definition of dividends.

Speaker 2:Let us break that down, because I know our listeners want the practical side of things. Let us start with interest income. How does the separation of company and individual treatment play out there?

Speaker 1:It is quite distinct now. If you are an individual tax resident in Cyprus, interest from things like government savings certificates, corporate bonds listed on a recognized stock exchange, or approved provident funds, that still attracts the SDC reduced rate of 3 percent. But for companies, it is a different story. They are now taxed at 15 percent on net profits under the Income Tax Law.

Speaker 2:So, individuals are still effectively under the SDC regime for interest, while companies have moved over to the standard corporate income tax framework?

Speaker 1:Exactly. Interest accruing to individuals is now taxed exclusively under the SDC Law and is exempt from income tax. Conversely, for companies, interest income is taxed solely under the Income Tax Law and is no longer subject to SDC, unless you fall into a very specific category, like certain religious or charitable institutions.

Speaker 2:And what about the General Health System, the GHS? I know that has been a hot topic for everyone living and working in Cyprus.

Speaker 1:It is critical to remember. For individuals, passive interest income is still subject to the GHS contribution at 2.65 percent. That is a mandatory contribution to the national healthcare system, and it is capped at an annual income of 180,000 euros. Even non-domiciled individuals are not exempt from this. It is a vital layer to consider when calculating your overall tax liability.

Speaker 2:That is a great clarification. Now, moving on to rental income. I heard that SDC is off the table entirely for rentals?

Speaker 1:That is right. As of January 1, 2026, the SDC layer on rental income is gone. It is now strictly a matter of personal income tax for individuals, or the 15 percent corporate tax rate for companies. If you are an individual landlord, you still face that 2.65 percent GHS contribution, but the removal of the SDC simplifies the math significantly.

Speaker 2:And what about the rise of platforms like Airbnb? Does renting out a self-catering property change the game?

Speaker 1:That is a crucial nuance. If you are renting out self-catering accommodation via online platforms, the law now treats that as business income under specific conditions. It is no longer just simple passive rental income. You are moving into the realm of corporate or professional income, which is subject to standard income tax. We really advise our clients to look at their specific operational setup there.

Speaker 2:Let us talk about the big one: Dividends. The withholding tax rate has been a major talking point.

Speaker 1:Indeed. The withholding tax has been reduced from 17 percent down to 5 percent as of January 1, 2026, for Cyprus tax resident and domiciled individuals. However, we have to look at the vintage of the profits. If you are receiving dividends out of profits earned up to December 31, 2025, those still carry the old 17 percent rate if received before the end of 2031.

Speaker 2:That is a very long runway. So, business owners have a specific window of time to manage their legacy profits.

Speaker 1:Precisely. And the rules on what constitutes a dividend have widened. It is not just the classic payout anymore. If a company reduces capital, dissolves, or liquidates, those distributions are now treated as dividends. Even capitalizing distributable reserves is caught in that net. We are also seeing the introduction of the concept of disguised dividends.

Speaker 2:Disguised dividends? That sounds like something that could catch people off guard.

Speaker 1:It is designed to be a deterrent. If an individual shareholder uses a company asset for private purposes, or if a company sells an asset to a shareholder below fair market value, that is now a disguised dividend, taxed at a 10 percent SDC rate. That is double the standard 5 percent. It is a clear message from the authorities to maintain proper arm’s length transactions.

Speaker 2:That is a significant shift in corporate discipline. What about royalties? Have they been impacted by this reform as well?

Speaker 1:Royalties on rights used within Cyprus generally face a 10 percent withholding tax, with a reduced 5 percent for cinematographic films. However, literary, dramatic, and artistic works are generally tax-exempt. It is a specialized area, but the core principle remains consistent with the broader effort to clarify tax treatment across the board.

Speaker 2:It feels like the entire landscape has been modernized, perhaps even cleaned up, to be more transparent and structured.

Speaker 1:That is the ultimate goal. The decoupling of individual and company treatment, the tightening of the dividend definitions, and the focus on anti-avoidance—it all points toward a more stable and predictable environment for the long term.

Speaker 2:It is definitely a lot for taxpayers to digest. For anyone listening, the takeaway seems to be that old structures might need a review. If you were operating under an assumption from two years ago, that logic probably does not hold up today.

Speaker 1:Exactly. Proactive planning is now more important than ever. Whether it is managing rental portfolios or restructuring dividend payouts, the 2025 reforms demand a fresh look at your legal and tax architecture.

Speaker 2:Natalie, this has been an incredible breakdown. You have made sense of a very dense piece of legislation, and I am sure our listeners appreciate the clarity.

Speaker 1:It was a pleasure, Marcus. Tax law is the foundation of economic certainty, and I am glad we could walk through these updates together.

Speaker 2:Thanks for joining us on this Deep Dive. We’ll see you on the next episode.