Cyprus has recently unveiled significant tax policy adjustments that directly impact various income streams. One notable change includes the reduction of the Special Defense Contribution (SDC) rate for passive interest income, presenting noteworthy implications for individuals and companies actively engaged in financial planning.
Understanding the Dynamics: Active vs. Passive Income
The recent tax reforms shed light on the vital distinctions between active and passive income, each playing a crucial role in financial planning. Active income, derived from employment or business activities, necessitates ongoing effort and direct involvement. This encompasses earnings such as salaries, commissions, tips, and sales income. Conversely, passive income as revenue gained neither from your portfolio nor wages does not require an ongoing effort. It stems from rental properties, limited partnerships, and self-charged interest, and offers a more hands-off approach once the initial investment is made.
Importantly, the management of portfolio income, even if unchanged for extended periods, is not considered passive income.
The Internal Revenue Service (IRS) recognizes the ongoing activity involved in actively managing investment portfolios.
Cyprus’ Tax Landscape: Key Developments
On December 6, 2023, Cyprus made a significant stride in its tax landscape as the parliament voted to reduce the Special Defense Contribution (SDC) rate for passive interest income. This rate, previously set at 30%, has now been lowered to 17%, creating a favorable environment for individuals and enterprises earning passive interest income.
Active interest income, a distinct category, is subject to Corporation Income Tax at the standard rate of 12.5%. In contrast, passive interest income is now subject to both Corporation Income Tax and the reduced SDC rate of 17%, reflecting a strategic shift in the country’s taxation policies.
For individuals and companies navigating these changes, Eurofast tax experts in Cyprus are well-equipped to provide guidance and tailored solutions. Our expertise ensures our clients and associates can effectively adapt to and leverage these innovations in Cyprus’ evolving tax environment. For any further inquiries, contact Eurofast office in Nicosia at nicosia@eurofast.eu
Eurofast Nicosia Editing Team
nicosia@eurofast.eu