4 June 2026
The Tax Department issued on 29 May 2026 Circular 2/2026, providing guidance on the alternative method of taxation for Special Contribution for the Defence (“SDC”), introduced in line with Article 3D of the Special Contribution for the Defence of the Republic of Cyprus Law of 2022, as amended (“SDC Law”).
The Circular provides clarifications on the following key aspects:
- The individuals eligible to apply for this alternative method of taxation.
- The procedure to be followed for applying to this alternative method of taxation.
- Practical considerations regarding the payment of the required lump-sum amount for the enrolment to this alternative method of taxation.
- The application form to be completed by individuals electing to be subject to this alternative method of taxation.
You can access the Circular issued by the Tax Department here.
Main provisions
As per the recent amendments to Cyprus tax legislation, as part of the Cyprus Tax Reform (for a comprehensive overview of the main provisions, you can access our report here), an alternative method of taxation in respect of SDC has been introduced with effect from 1 January 2026.
The alternative method of taxation is available for individuals who do not have a domicile of origin in Cyprus and in any year, are considered to be deemed domiciled in Cyprus, in accordance with the provisions of Article 2(3) of the SDC Law.
Eligible individuals may elect to apply for this alternative method of taxation by submitting an application to the Tax Department. This alternative method of taxation may be utilised for a maximum of two additional five-year periods (i.e. 5 + 5 years).
This alternative method of taxation extinguishes the SDC liability of a taxpayer on interest and dividend income (derived from both Cyprus and abroad and irrespective of the level of the actual income earned), through the payment of an upfront lump sum of €250.000, for each five-year period. It is important to note that the election is irrevocable and under no circumstances, will the Tax Department refund the €250.000 lump-sum payment.
The Circular further clarifies that individuals who became deemed domiciled in Cyprus in the 2024, 2025, or 2026 tax years, may apply to be subject to this alternative method of taxation by 30 June 2026.
KPMG in Cyprus observation
This is a positive development, as the Circular issued by the Tax Department provides practical guidance on the application of Article 3D, regarding the alternative method of taxation for SDC. The Circular clarifies the eligibility criteria, application procedure and relevant deadlines for eligible individuals wishing to elect this alternative method.
It is important to note that an extensive range of practical examples are also included in the Circular, covering all important aspects of this alternative method of taxation.
Moreover, the Circular provides key considerations for eligible individuals who may benefit from this regime, by extending their non-dom status in Cyprus for up to two additional five-year periods, in order to enable them to make an informed decision on whether to enrol in the regime and understand the procedure to be followed.
Taking into consideration that the submission deadline for enrollment in this regime is 30 June 2026, eligible individuals wishing to benefit from this regime should proceed with the submission of their application to the Tax Department as soon as possible.
