Executive summary

On 10 April 2025, the Cyprus House of Representatives passed legislation introducing defensive measures against low-tax jurisdictions (LTJ). More specifically, dividend payments made to associated companies in LTJ will be subject to withholding tax (WHT) at the rate of 17%. In addition, interest and royalty payments made to associated companies in LTJ will not be deductible for corporate tax purposes. The measures against LTJ will enter into effect on 1 January 2026.

The legislation also amends existing provisions that require WHT on dividend, interest and royalty payments made to companies in European Union (EU) "blacklisted" jurisdictions (BLJ). These amended provisions will enter into effect once the law is published in the Official Gazette, which is expected to occur in the next couple of weeks.

The measures are supplemented by general anti-abuse rules (GAAR) and treaty renegotiation provisions.

Detailed discussion

In alignment with the milestones set under Cyprus's Recovery and Resilience Plan, and in response to international commitments for enhancing tax transparency and fairness, the House of Representatives voted on 10 April 2025, to introduce a comprehensive framework of defensive tax measures aimed at companies located in BLJ and LTJ.

Overview of new measures

The defensive measures repeal the existing framework applicable to BLJ and replace it with a broader and more robust regime that extends to LTJ. The new rules impose a combination of WHT and expense denial rules depending on the nature of the payment and the classification of the jurisdiction. The table below summarizes the rules.

Jurisdiction definitions

BLJs are those included in the EU list of non-cooperative jurisdictions (Annex I) at the time of the transaction and in the previous calendar year.

LTJs are those with a corporate tax rate that is lower than 50% of Cyprus's corporate tax rate (the current CIT rate is 12.5%).

Scope and application

The defensive measure will apply where the recipient of the income is an associated company registered in BLJ or LTJ (depending on the type of payment) and is not tax resident in a jurisdiction that is not a BLJ or LTJ. For the measure to apply, the payment must be made to a company that has a direct or indirect association with the Cypriot company making the payment that exceeds 50%, either alone or together with other associated persons. The law includes a definition as to when a person is considered associated with another person.

The rules also extend to payments made to permanent establishments (PEs) in BLJ/LTJ jurisdictions regardless of whether the PE is maintained by a company that is not in a BLJ/LTJ. Certain exceptions apply.

General Anti-Abuse Rule

A GAAR mechanism is embedded into the framework to counteract arrangements lacking commercial substance that are primarily designed to circumvent the application of the defensive measures. Essentially, the GAAR is aiming to combat arrangements for interposed entities that are not in BLJ/LTJ. If relevant criteria are not met, the defensive measure will apply unless the taxpayer demonstrates valid commercial reasoning. The Council of Ministers is expected to issue a decree in the next few weeks providing additional information, such as the qualifying criteria.

Treaty renegotiation provisions

In cases where Cyprus maintains tax treaties with jurisdictions classified as BLJ or LTJ, and those treaties do not grant taxation rights to Cyprus for imposing WHT on dividends (LTJ and BLJ) and interest and royalties (LTJ), the law states that the Cyprus Republic will inform the other contracting state within three years to initiate a treaty renegotiation process.

Implications

Businesses engaging in cross-border activities involving LTJ and/or BLJ should assess the impact of the defensive measures. Key considerations include:

• Understanding relevant features of the new rules and how this could impact existing or future cash flows
• Reviewing the ownership structure to determine if any of the shareholder companies may fall within the ambit of the new rules and whether dividend WHT could apply
• Reviewing existing intragroup financing and intellectual property (IP) licensing arrangements to evaluate exposure to WHT or denial of expense deductions
• Confirming adequate documentation of commercial substance for payments made to associated companies in jurisdictions that are not BLJs or LTJs
• Anticipating treaty changes that may alter the treatment of payments under current tax treaty protections

Next steps

Taxpayers should consider undertaking a comprehensive review of affected structures and arrangements and consider proactive restructuring where appropriate. Guidance should also be sought on substance requirements under the GAAR.