How to distribute dividends in Cyprus?

Cyprus is often chosen as a place of incorporation for companies due to its favorable tax jurisdiction. This country has long been famous for its low tax rates, efficient company management, and high level of flexibility in solving legal business issues.

In this article, we consider in detail one of the most pressing questions of our clients: How are dividends distributed in Cyprus? We will reveal the procedures and requirements that apply to shareholders. We will also explain the process of dividend distribution, ensuring that you have an up-to-date understanding of dividend distribution before choosing this jurisdiction for company registration.

What law regulates the dividend distribution process in Cyprus?

So, if we go directly to the topic of dividend distribution in Cyprus, it is important to note the regulatory framework for regulating this process. And here it should be noted that there are no strict rules related to the distribution of dividends in the legislation of Cyprus. The only legislative act that generally regulates this issue is «The companies law», also the distribution of dividends is regulated by:

• (i) principles of common law;
• (ii) provisions of the company charter;
• (iii) First Schedule of Table A (“The companies law”), establishing the model provisions of the company charter and in some cases specified in«The companies law», are mandatory.

After getting acquainted with the regulatory framework where you can find answers to your questions, in the next part of this article we will tell you about the distribution process itself, how dividends are distributed, and what is required for this.

How are dividends distributed and what is required for this?

So unlike many other jurisdictions, there are two types of dividends that can be distributed in Cyprus:

1. Interim dividends and
2. Final dividends

The difference lies in the mechanism for announcing and approving dividends. Interim dividends are announced and approved by the board of directors before the annual general meeting of shareholders and before the submission of financial statements. On the other hand, final dividends are declared at the annual general meeting on the recommendation of the board of directors after the audit of the company’s financial statements is completed.

In any case, dividends are distributed from the retained earnings of the company, on the basis of audited financial statements in the case of Final dividends and on the basis of interim accounts in the case of Interim dividends.

So in Cyprus, there is basically only a requirement to distribute dividends from the company’s retained earnings. All other issues in practice should be regulated in the company’s internal documents, for example, the Article of Association. It is important to include in the company’s articles of association clear rules regarding the payment procedure, amount, and regularity of dividends so that companies can effectively manage the dividend payment process by following their own articles of association.

What to do if one of the shareholders does not want to distribute dividends?

Another popular question concerns what to do if one of the shareholders does not want to distribute dividends. The answer to this question is that there are no specific instructions in Cyprus law regarding the refusal to receive dividends. However, according to general accounting standards, such unpaid amounts may remain as a debt of the company or, otherwise, the members may increase the authorized capital of the company at the expense of this undistributed amount, resulting in an increase in the share of a particular shareholder or shareholders.

However, in this case, there is a way out of the situation: if one of the shareholders does not plan to receive his part of the dividends, he can transfer this income to the company in the form of returnable financial assistance and in this case stipulate the possibility of returning the dividends without increasing the share in the company.

How are dividends taxed in Cyprus?

The last but not least important aspect of interest to our clients is the taxation of dividends. Moving directly to taxation issues, it is important to note that the following key taxes apply when distributing dividends:

1. Corporate income tax, with a fixed rate of 12.5%. This rate can be reduced to 2.5% if you use the IP Box regime in Cyprus known as the IP Regime.
2. Withholding tax (WHT) when paying dividends is not charged in accordance with the tax legislation of Cyprus and is 0%.

Corporate income tax and the absence of Withholding Tax (WHT) on dividends create a favorable tax climate for investors. Understanding this allows you to effectively plan your taxes and maximize benefits for yourself and other participants.

Given the key advantages of the dividend distribution system in Cyprus, this jurisdiction is popular with investors and is often chosen due to favorable conditions. So, if you are interested in Cyprus, we will be happy to assist you with company registration, preparation of internal documents, and administration of the entire dividend distribution process.