Cyprus’s 2026 tax reform has been welcomed mostly for what it takes away. The deemed dividend distribution rules are abolished for profits earned from 1 January 2026, and the Special Defence Contribution (“SDC”) rate on actual dividends falls from 17% to 5%. Less attention has been paid to what the same legislation adds. Alongside those reliefs, Parliament introduced a targeted anti-avoidance charge on disguised dividends, taxed at 10% – deliberately double the new dividend rate.

 

For many owner-managed Cyprus companies this is the single most consequential change in the package, because it attaches tax to arrangements that were previously informal, unremarkable and, in most cases, never documented at all: the car in the company’s name that the shareholder drives, the apartment the company owns that a family member lives in, the asset sold to a shareholder at book value rather than market value.

 

What the legislation actually introduced

 

The reform package was voted by the Cyprus Parliament on 22 December 2025 and published in the Government Gazette on 31 December 2025, amending six laws including the Special Contribution for the Defence Law. The disguised dividend provisions apply to direct and indirect shareholders who are natural persons, and impose SDC at 10% on the amount treated as a disguised dividend.

 

Two situations trigger the charge:

 

• Private use of a company asset by the shareholder, or by an individual related to the shareholder.
• Disposal of a company asset to an individual shareholder, or a related individual, for consideration below fair market value.

 

Neither limb requires any intention to avoid tax. There is no motive test to fail. If the facts are present, the charge follows.

 

How the charge is measured – and why the figure surprises people

 

The most commonly misunderstood point is the base on which the 10% is applied. It is not an annual benefit figure of the kind used for employment benefits in kind. The measure is drawn from the market value of the asset itself.

 

Trigger	Amount treated as a disguised dividend
Private use of a company asset	Market value of the asset at the commencement of private use, multiplied by the initial percentage of private use. Where the asset is not connected to the company’s business, the percentage of personal use is taken as 100%. A further amount arises on any subsequent increase in the percentage of private use, measured on the market value at that time.
Disposal below market value	Market value of the asset at the date of disposal, less the consideration actually paid, reduced by any amount already captured under the private use limb.

 

Two features of this mechanism deserve emphasis. First, a reduction in the percentage of private use produces no refund, and no refund of SDC charged under these provisions is available in any circumstance. Second, because an asset with no connection to the company’s trade is treated as 100% privately used, a residential property held in a trading company and occupied by the shareholder’s family is measured on its full market value.

 

By way of illustration only: a company holds a vehicle with a market value of €60,000 which is not connected to its business and is driven by the shareholder. The disguised dividend is €60,000 and the SDC charge is €6,000. The same arithmetic applied to a €400,000 apartment produces €40,000. These are simple applications of the statutory formula, not figures published by the Tax Department.

 

Who is caught, and who is not

 

Position of the individual shareholder	Disguised dividend charge
Cyprus tax resident and domiciled	Within scope – SDC at 10%
Cyprus tax resident benefiting from the non-domicile regime	Outside scope
Indirect individual shareholder, through one or more companies	Within scope, subject to the same residence and domicile position

Source: Special Contribution for the Defence Law as amended by the tax reform laws published in the Government Gazette on 31 December 2025, as summarised in PwC Cyprus, Direct Tax Update, Issue N-1-2026.

 

The non-domicile carve-out is significant and, for internationally mobile owners, decisive. An individual who is Cyprus tax resident but not domiciled in Cyprus falls outside SDC generally, and therefore outside this charge. Owners who have become deemed domiciled by virtue of seventeen years’ residence in the last twenty are inside it.

 

The exclusions that matter in practice

 

The provisions do not apply in the following cases:

 

• Assets donated to the company by the shareholder making private use of them, or by individuals related to that shareholder.
• Cases where the benefit-in-kind provisions of the Income Tax Law already apply. Where the shareholder is also an employee or director and the asset is properly reported as a benefit in kind, the employment tax treatment takes precedence.
• Distributions made in the context of a capital reduction, a dissolution or a liquidation.

 

The benefit-in-kind interaction is the one most owner-managers should examine first. Cyprus already operates a benefit-in-kind regime for employees and directors, and a company car correctly brought within it should not attract a second charge under the disguised dividend rules. Where the benefit has never been reported, however, there is now a second and considerably more expensive route to the same asset.

 

A new reporting obligation, and where the relief goes

 

Companies distributing dividends, including disguised dividend distributions, must issue a certificate to each shareholder stating the dividend amount paid, any disguised dividend distribution, the SDC withheld on those amounts, and the fiscal year in which the underlying profits were earned. In other words, the position now has to be stated on the record annually rather than left to be discovered on enquiry.

 

There is also a knock-on effect worth tracking. Amounts already subjected to SDC as disguised dividends reduce the amount of any later actual dividend that is subject to SDC, and an asset on which the charge has been suffered is excluded from the deemed benefit provisions of article 33 of the Income Tax Law. Relief is therefore available, but only if the disguised dividend has been identified, quantified and recorded in the first place.

 

What we would suggest reviewing now

 

A short, practical review answers most of the exposure. Identify every asset on the balance sheet that is used, wholly or partly, by a shareholder or a member of a shareholder’s family. Establish whether each is connected to the company’s business and what percentage of private use applies. Confirm the domicile position of every individual shareholder, direct and indirect. Check whether an existing benefit-in-kind treatment already covers the arrangement. Finally, price any planned transfer of a company asset to a shareholder at market value, supported by evidence, before it happens rather than afterwards.

 

Companies that were comfortable holding personal-use assets in corporate name because the cost of doing so was negligible now have a quantified reason to revisit that decision. The arrangement is not prohibited; it simply has a price attached to it for the first time.

 

How we can help

 

CYAUSE Audit Services can review your company’s fixed asset register and shareholder arrangements against the disguised dividend provisions, quantify the exposure, assess whether the benefit-in-kind route produces a better outcome, confirm the domicile position of each shareholder, and put the required shareholder certificates and supporting valuations in place. Where a restructuring of asset ownership is appropriate, we can model the alternatives before anything is transferred.

 

This article is provided for general information only and does not constitute investment, tax, legal or audit advice. No action should be taken on the basis of its contents without specific professional advice on the particular facts. Interested parties are invited to enquire at enquiries@cyprusaccountants.com.cy or on +357 22 336 309.

 

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About Us

 

CYAUSE Audit Services advises Cyprus owner-managed companies and their shareholders on precisely the matters this article deals with: corporate and personal tax compliance and advisory, Special Defence Contribution and dividend planning, benefit-in-kind treatment for directors and employees, fixed asset and shareholder transaction reviews, tax residency and domicile determinations, payroll, and statutory audit engagements. We prepare shareholder dividend certificates, quantify disguised dividend exposure and advise on the ownership of company cars and company property as a matter of routine.

 

CYAUSE Audit Services is an Audit & Assurance firm with offices in Cyprus and the UAE. During 2015 we have been awarded by I.C.P.A.C and the A.C.C.A (local and international association of Chartered Certified Accountants) for the Quality of our Audit Services and our Office’s Procedures.

 

Being a Truly International Audit & Assurance firm, we have associates from all over the world and we are constantly looking for new associates to expand our network further. At present, CYAUSE Audit Services operates internationally through its membership with BKR International amongst the largest American associations in the world, Accace Circle, a co-created business community of like-minded BPO providers and advisors who deliver outstanding services with elevated customer experience. Our network covers almost 40 jurisdictions with over 2,000 professionals, it supports more than 10,000 customers, mostly mid-size and international Fortune 500 companies from various sectors, and processes at least 170,000 payslips globally.

 

CYAUSE Audit Services Ltd is also a member of BKR International one of the biggest US Accounting Associations of the word and the 3E Accounting Network, an international accounting network which originates from Hong Kong and has more than 80 members from all over the world.

 

Contact Us

 

If you would like us to assist you with a disguised dividend exposure review, benefit-in-kind and dividend planning, shareholder certificates or your Cyprus corporate and personal tax compliance, please contact us at enquiries@cyprusaccountants.com.cy or call us at +357 22 336 309.

 

Learn More about Cyprus Corporate Environment

 

Information about CYAUSE Audit Services and the Cyprus Corporate & Tax System can be obtained from our Website or our YouTube channel which provides valuable information about the Corporate & Tax Environment of Cyprus.