This is about profits earned from 2026 onward. On those, a dividend paid between two Cyprus companies carries no Special Defence Contribution, and a dividend paid to a Cyprus resident and domiciled individual carries five per cent. A company added above an existing shareholding means the dividend arrives at a company rather than at the shareholder, and the charge waits for as long as the money stays there. This is advice currently being given and the arithmetic of it holds. What the Special Defence Contribution Law adds, in the form the 2025 amending law left it, is two provisions asking what else the company changes.
Holding companies are usually right, for reasons that have nothing to do with this charge, and neither provision suggests otherwise. What the two provisions do is put a question on the checklist, alongside where the company is managed and what it reports. It may already have been considered, and confirming that it was is a short piece of work.
Why nothing closes it now
Two older rules used to close that gap on a timetable, one deeming a share of a company's profits distributed after two years, the other reaching dividends received indirectly after four. The 2026 reform retired both for profits earned from 2026 onward. What each still reaches on older profits, and at what rates, is set out in the companion piece on holding companies after the reform.
So the deferral the advice describes is real. Nothing on the calendar will close it.
The first test: what the company is for
The 2025 amending law replaced Article 3 in its entirety. Inside the replacement is a proviso addressed to exactly this arrangement. It has three parts.
A dividend has been distributed to a company. A Cyprus resident and domiciled individual participates in that company, directly or indirectly, with more than half of the votes, the capital or the entitlement to profits. And, in the Commissioner's judgement, the interposition of that company as shareholder serves no substantial commercial or economic purpose. Its main purpose is instead one of the three the Law names, which it calls the avoidance, the reduction or the deferral of the contribution.
Where all three parts hold, the Commissioner may treat the dividend as paid to the individual. He may then collect from either the company that received it or the individual behind it.
The proviso sits immediately after a sub-proviso dealing with a transitional rate, which leaves room to argue it reaches no further. Its indentation places it at the level of the paragraph rather than of that sub-proviso, and the same drafting appears elsewhere in the article, so it qualifies the paragraph as a whole.
The second test: the general anti-abuse rule
The same amending law also inserted a general anti-abuse rule into the Special Defence Contribution Law. A reader who checks the proviso alone will take false comfort from it. The general rule disregards an arrangement, or a series of arrangements, on two cumulative conditions. The main purpose, or one of the main purposes, must have been to obtain a tax advantage that defeats the object or purpose of the applicable provisions. And the arrangement must not be genuine, which the Law defines as not put in place for valid commercial reasons reflecting economic reality.
The two are different shapes. The proviso needs the main purpose to be one of the three named, together with the absence of any substantial commercial or economic purpose. The general rule needs the tax advantage to be only one of the main purposes, but that advantage has to defeat the object or purpose of the provisions, and the arrangement has separately to fail the economic reality question. Clearing the first leaves the second still to answer.
Why a company added now is the harder case
A holding company formed years ago, for a reorganisation or a lender or a succession plan, has a history to point to. Whatever it was for, it was not for a charge that did not exist at the time.
A company inserted now, above a shareholding the individual already holds, is in a different position. If nothing else changes, the arrangement has one fact to offer: the shareholder used to receive the dividend personally, and a company now receives it. That is not a criticism of anyone, only a description of how little the file will contain if the interposition is the only thing that happened.
The question is not whether the structure works. It is what the file says about why it is there.
Where the interposition is part of something real, there is more to say. A reorganisation that consolidates a fragmented register. A lender that requires a single borrower. A succession arrangement that needed a vehicle to hold the shares. A separation of one line of business from another ahead of a sale. Reasons of that kind exist before the tax question is asked, and they can be evidenced from documents written when the decision was taken.
What both tests are asking for
The same things any purpose test asks for, and the checking is short.
Whether the interposition does anything other than change who receives the dividend. Whether the reason for it was recorded at the time, in a board minute or a shareholders' agreement, rather than reconstructed later. Whether the group's conduct since matches what the structure was set up to do. And whether both tests were considered, not just the proviso, since they are drafted to different thresholds.
That last one is the item most likely to have been missed, because the general rule is new and sits some distance from the provision on dividends. It is worth asking whether it was run.
The honest position on outcome is that nobody can give one. The proviso turns expressly on the Commissioner's judgement, and the general rule turns on economic reality, which is a question about facts rather than about drafting. A deferral of this kind may or may not survive examination. What can be settled in advance is whether an answer is available when the question is put. The tax restructuring practice looks at this before the structure goes in, which is when it is cheapest to look.