The defence contribution that is not kept for defence

Cyprus has a tax with "defence" in its name. Most people never see it on a payslip, because it falls on dividends and interest, not on pay. It is called the Special Defence Contribution, and it brought in €465 million in 2024 and again in 2025.

What the numbers say

Where it came from. The levy began on 1 February 1984, "for strengthening the defence capability of the Republic". It was 0.5% on almost everything: salaries, with another 0.5% from employers, pensions, the self-employed, dividends, interest, rents and company profits. The money went into a separate Fund for the Defence Armament of the Republic, run by the Ministers of Defence and Finance under the President, with accounts that were confidential by law.

When it stopped being kept apart. A law of January 2000 abolished the Fund and sent its money to the Consolidated Fund, the state's general account. Since then the contribution has been ordinary revenue, pooled with every other tax and spent on whatever the budget pays for. The 2027 budget books it as part of income tax on people. The words saying what it was for, "for strengthening the defence capability of the Republic", stayed in article 3 of the law until the end of 2025; the 2026 reform rewrote the article without them.

What it falls on. Since 2003 it has fallen only on dividends, interest and rent. Just before the reform it was 17% on dividends, 17% on interest (30% from 2013 to 2023) and 3% on three quarters of rent. In 2025 dividends brought in €333 million, more than seven euros in every ten, interest €83 million and rent €32 million. Its highest year in euros since 1995 was 2013, at €476.5 million, more than a tenth of all taxes; in 2024 it was 5.5%.

What changed in January 2026. The reform of 2026 cut the rate on dividends from profits made from 2026 to 5%. Dividends paid from older profits still pay 17% if they are paid within six years. The rule that treated 70% of a company's profits as paid out after two years, and taxed them whether or not they were, ends with the profits of 2025. The charge on rent is gone. Interest still pays 17%, but government and listed bonds pay 3%. A new 10% applies to disguised payouts, such as a shareholder using company assets for free.

The Ministry of Finance put the cost of the dividend cut alone at 0.56% of the economy from 2026, about €216 million a year by our arithmetic, and the end of the deemed payouts at about 0.2% from 2028. The budget's figures fall unevenly: €277 million in the budget for 2026, €357 million in the 2027 bill, and €177 million a year in its plans for 2028 and 2029. The bill does not say why 2027 is higher; dividends from profits made before 2026 still pay 17%, and the deemed payouts on 2024 and 2025 profits fall due in January 2027 and January 2028.

What it means for you

If you have savings in a bank, 17% of the interest is kept back before it reaches you, and 2.65% more goes to GESY. If your total income is up to €12,000 a year you can claim back everything above 3%. Interest on Cyprus government savings bonds pays 3%.

If you own shares in a company, dividends from profits made from 2026 pay 5% plus 2.65% for GESY, instead of 17% plus 2.65%. There is no income tax on dividends or on interest from savings; this contribution takes its place.

If you let out a flat, the 3% charge on rent ended with 2025. Rent is still taxed as income and still pays 2.65% to GESY.

If you moved to Cyprus from abroad and were not born into a Cypriot family, you probably pay none of it. The contribution falls only on people who are both tax resident and domiciled in Cyprus. You are tax resident if you spend more than 183 days a year in Cyprus, or at least 60 days if you also work or run a business here, keep a home here and spend no more than 183 days in any other single country. Domicile is, roughly, the country you belong to by birth and family, unless you have settled for good somewhere else. Someone whose domicile is elsewhere, a "non-dom", pays no contribution on dividends or interest for up to 17 years of residence. Nobody grants the status: you declare it to the Tax Department on form T.D.38. After 17 years in the last 20 you count as domiciled, but from 2026 you can instead pay €250,000 for five years, at most twice. Non-doms still pay the 2.65% for GESY.

This is a summary of the law as it reads in October 2026, not tax advice.

What people argue

Is the name honest? Since 2000 the money has not been set aside for defence, and since January 2026 the law no longer says what it is for. DIKO leader Nikolas Papadopoulos called it neither extraordinary nor really connected to defence, as reported by StockWatch in December 2025. EDEK's Marinos Sizopoulos said in 2023 that the money was never used in full for defence because it goes into the Consolidated Fund, and proposed a dedicated fund for arms. The figures cut the other way too: in 2025 the contribution was 83% of the size of the Ministry of Defence's budget, and the 2027 bill plans to spend two and a half times what the contribution is expected to raise. We found no party or official making this point.

Was cutting it on dividends right? Finance Minister Makis Keravnos presented the package as fairer and good for foreign investment, as reported by the Cyprus Mail; it passed with the votes of DISY, DIKO, DIPA and EDEK. DIKO's leader said the change removed outdated provisions and put Cypriot businesses on an equal footing, as reported by StockWatch. EDEK MP Ilias Myrianthous voiced concern about the cut on dividends. AKEL and the PEO union attacked the reform as a whole for not taxing high incomes and wealth.

Is the non-dom exemption fair? For someone living on dividends and interest it means paying 2.65% for GESY instead of the contribution as well. The government's explanatory report on the bill presents the new €250,000 option only as an alternative for people who have been here 17 years, without a reason of its own. We found no official count of how many people use the exemption, and no party, union or official statement on whether it is fair or needed. The accountants' body SELK had reservations about the new domicile provisions, as reported by InBusinessNews.

How we know

The rules are from the law on the Special Defence Contribution (117(I)/2002, as amended to law 245(I)/2025), the original laws of 1984 and 1985, and the law of 2000 that abolished the Defence Fund, all read on CyLaw. The wording on the levy's purpose before 2026 is from an archived copy of the consolidated law dated February 2025. The residence rules are from the Income Tax Law, the GESY rates from the GESY Law (89(I)/2001), and the domicile forms from the Tax Department's page on tax residency.

Receipts for 1995 to 2024 are from CYSTAT's detailed list of taxes; CYSTAT records the whole contribution as a tax on company income. The 2025 outturn, its split by type, and the figures for 2026 to 2029 are from the revenue articles of the 2027 budget bill, on a cash basis; they match CYSTAT for 2024. The Tax Department's own collection table gives somewhat lower totals (€434 million against €465 million in 2024), and we do not mix the two. The cost of the cut is from the Ministry of Finance's Annual Progress Report of April 2026; the euro figure is our arithmetic. The Ministry of Defence's budget is from the 2026 budget and the 2027 bill. The politicians' statements are as reported by StockWatch, Sigmalive and the Cyprus Mail. Before 2003 the levy was a broader tax that also fell on pay, so the earliest years in the chart are not like for like.