The special defence contribution is a separate tax imposed by Law to enhance the defence capacity of the Republic. Among those obliged to pay it are the shareholders of a company who are residents in the Republic, and it is charged at 17 per cent on the amount of the dividend they receive or are deemed to receive from the company. The company must, at the end of the two years following the tax year in which it made profits, pay the special defence contribution, regardless of whether or not it distributed the profits as dividends to its shareholders. It is deemed that the company has distributed 70 per cent of its profits in the tax year after deducting the corporate tax which was paid or is payable on these profits. The term ‘corporate tax’ includes the special defence contribution, the capital gains tax and any amount of foreign tax that is not credited against the income tax and or against the special defence contribution for the year in which they are due.
The law provides that any special defence contribution payable by a shareholder as a consequence of a deemed dividend distribution is payable primarily by the company, which will charge such a contribution to the shareholders. In case of non-payment, the company is responsible, being the one that made the profits, to pay the special defence contribution. If the company disagrees with a decision of the director of the Inland Revenue Department only the company itself can object and file a recourse before the Administrative Court.
The Supreme Court in a judgment issued on 20.7.2021 examined the appeal of a company against a first instance judgment that rejected the recourse against the special defence contribution on the deemed distribution of dividends for the profits made from the sale of its immovable property, which had been taxed with capital gains tax before the amendment of the Law. The company claimed that it was subject to double taxation, that the capital gains resulting from the disposal of immovable property were part of its accounting profits and that the capital gains tax it paid was not deducted. Moreover, it claimed that it had not distributed the profits and the persons accountable to pay the special defence contribution were its shareholders when they received the dividends.
The Supreme Court stressed that the Court of first instance correctly pointed out that the law refers to “deemed distribution of dividend” on accounting profits, which are not affected by offsetting losses, as well as from any amounts, including additional depreciation arising from or as a result of revaluation of movable and immovable assets. It added the obligation of a company to pay the special defence contribution for the deemed distribution of its accounting profits, in the form of a dividend to its shareholders, is independent of the way the company’s profits have been used and from the payment of a real dividend.
The court pointed out that the law provides for the payment of the special defence contribution in respect of a deemed dividend and not a real one in relation to accounting profits which are deemed to have been distributed to the shareholders. It is the company that has the obligation primarily to submit to the director the relevant declaration of the deemed dividend and for the payment of the special defence contribution. It stated, however, that in this case the law applied as it had before its amendment, i.e. before the addition of the reservation which explicitly included in the term ‘corporate tax’ and the capital gains tax. Under the circumstances, it did not constitute double taxation since the company was subject to capital gains tax for the sale of its immovable property, while the disputed special defence contribution was charged to its shareholders on the basis of the deemed dividend distribution.
George Coucounis is a lawyer practicing in Larnaca and he is the founder of George Coucounis LLC, Advocates & Legal Consultants, [email protected]