Executive summary

New laws in Cyprus that enact defensive tax measures targeting low-tax and "blacklisted" jurisdictions entered into force on 16 April 2025, upon publication in the Official Gazette of the Republic. However, the relevant measures against low-tax jurisdictions will enter into effect on 1 January 2026. Blacklisted jurisdictions are those included in the European Union (EU) list of noncooperative jurisdictions (Annex I) at the time of the transaction and in the previous calendar year. (For background, see EY Global Tax Alert, Cyprus introduces defensive tax measures targeting low-tax and 'blacklisted' jurisdictions, dated 15 April 2025.)

On 17 April 2025, the Council of Ministers issued two decrees that stipulate the provisions for applying the anti-abuse rules in relation to the defensive measures for blacklisted jurisdictions. Two decrees were necessary because royalty withholding tax is imposed under the Income Tax Law, whereas withholding tax for interest and dividend is imposed under the Special Contribution for the Defense Fund of the Republic Law.

Detailed discussion

GAAR provisions included in the law

As discussed in the previous Global Tax Alert referenced above, a general anti-avoidance rule (GAAR) mechanism is included in the law 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 a blacklisted jurisdiction.

The law provides that if (1) the main purpose, or one of the main purposes, of an arrangement or series of arrangements is to obtain a tax advantage that defeats the object or purpose of the defensive measures, and (2) considering all relevant facts and circumstances, the arrangement or series of arrangements has not been put into place for valid commercial reasons that reflect economic reality, the defensive measure shall apply ignoring the arrangement or series of arrangements.

Moreover, the law directs the Council of Ministers to issue a decree for the application of this provision. To the extent that the relevant conditions described in the decree are not met, the defensive measure shall apply unless the company making the payment demonstrates that (1) the arrangement or series of arrangements was put in place for valid commercial reasons that reflect economic reality or (2) obtaining a tax advantage was not the only purpose of the arrangement or series of arrangements.

Decrees issued for the application of the GAAR provisions

On 17 April 2025, the Council of Ministers issued relevant decrees for applying the anti-abuse provisions in relation to withholding tax provisions for payments to EU blacklisted jurisdictions. It is expected that additional decrees will be issued toward the end of 2025 for the defensive measures pertaining to low-tax jurisdictions.

The decrees provide that every company making a payment of dividends, interest or royalties to an associated company (as defined in the law) for which no tax is withheld, as required under the relevant provisions of the law for blacklisted jurisdictions, must maintain for six years supporting documentation about the company receiving the income.

The documentation requirements do not apply if the recipient company is:

1. A tax resident of Cyprus
2. A tax resident in another EU Member State or in the European Economic Area
3. Part of a multinational group and subject to a minimum tax of 15% based on legislation adopting the EU Directive 2022/2523 on global minimum tax or the Organisation for Economic Co-operation and Development Model (GloBE) Rules
4. A member of a consolidated group for accounting purposes that does not have a presence in a blacklisted jurisdiction, either through a company or through a permanent establishment

The decrees do not make any reference to situations in which a payment is made to a company that is tax resident in a jurisdiction with which Cyprus has concluded a tax treaty for the avoidance of double taxation.

Substance and other requirements for satisfying the anti-abuse provisions

To satisfy the anti-abuse provisions on payments to associated entities, the recipient company must satisfy at least five of six criteria outlined in the decrees (listed below). A company making payments to an associated company without applying the defensive measure must check and retain supporting documentation for at least six years from the end of the tax year in which the transactions occurred, supporting the following matters in relation to the company receiving the income:

1. Effective decision-making: At least one board member is qualified and authorized to make decisions regarding the company's activities, assets or rights that generate the income of the company and is actively and independently exercising his duties.
2. Local presence of decision-makers: At least one board member resides in the jurisdiction where the company is tax resident or within a distance that allows the individual to commute daily.
3. Office space: The recipient company has office space at its disposal in the jurisdiction of its tax residence that allows its directors and employees to exercise their duties.
4. Board meetings: The majority of the board meetings take place in the tax-residence jurisdiction of the recipient company.
5. Operational expenses: The recipient company's operational expenses (including the remuneration of directors and employees) that are paid to persons in the jurisdiction where the recipient company is tax resident for the tax year to which the transactions relate are proportional to its activities.
6. Beneficial ownership: The group of companies of which the recipient company is a part is not structured such that the company's only activity is to collect the income from the Cypriot company and then transfer that entire amount (or almost the entire amount) to another associated company very soon after the income is received so that it realizes an insignificant amount of taxable income while effectuating the transfer of funds to the beneficial owner of the income.

If the recipient company fails to satisfy at least five of these conditions, the arrangement (or series of arrangements) shall be disregarded and the defensive measure shall apply, unless the taxpayer provides evidence that (1) the arrangement (or series of arrangements) was put in place for valid commercial reasons reflecting economic reality or (2) obtaining a tax advantage was not the only purpose of the arrangement or series of arrangements.

Administrative enforcement and penalties

To support the new framework, the Assessment and Collection of Taxes Law was amended to give tax authorities the right to request that taxpayers submit returns for confirming compliance with the documentation requirements as described in the relevant decrees.

The law includes administrative penalties for failure to provide the tax authorities with the requested information within 60 days as follows:

• €2,000 if documents are submitted between days 61-90 from the request
• €4,000 if submitted between days 91-120
• €10,000 if submitted after day 121 or not submitted at all