Withholding Tax On Payments To Non-Cooperative And Low-Tax Jurisdictions

It is to be noted that, in accordance with the Recovery and Resilience Plan for Cyprus ("RRP") submitted by Cyprus in 2021 and last modified in 2024, Cyprus has committed to introducing a withholding tax on outbound payments of dividends, interest and royalty payments to low-tax jurisdictions. As per the RRP, the Cypriot authorities retained the right to explore instead the approach of applying non-deductibility in respect of interest and royalty.

Following the publication in the Government Gazette on 16/4/2025 of Law No. 47(I)/2025 and Law No. 48(I)/2025, the rules adopting defensive measures as per Cyprus' commitment under the RRP are differentiated and are no longer limited to withholding taxes being imposed on payments to companies that are tax resident or organised in EU blacklisted jurisdictions. Defensive measures concerning dividend, interest and royalty payments are also introduced.

The rules are amended as follows:

Key Definitions

An EU blacklisted jurisdiction for the purposes of the amendments is a jurisdiction that is included in:

• the latest published and valid edition of the EU blacklist in the calendar year in question; and
• the latest published edition of the previous calendar year.

A low-tax jurisdiction is defined under the current amendments as a jurisdiction of a third country in which the corporate tax rate is less than 50% of the Cyprus corporate tax rate of 12.5%.

Dividends

Companies that are not tax residents of Cyprus which:

1. Are tax residents in a low-tax jurisdiction or are incorporated in a low-tax jurisdiction and are not residents of a country which is not a low-tax jurisdiction; or
2. Are tax residents in an EU blacklisted jurisdiction or are incorporated in an EU blacklisted jurisdiction and are not residents of a country which is not an EU blacklisted jurisdiction,

and receive dividends distributed by a Cyprus tax resident company shall be subject to Special Contribution for the Defence at the rate of 17%.

The recipient in scope also includes permanent establishments.

The rule will also apply to the distribution of assets in the context of a share capital reduction, to the extent that the value of the distributed assets exceeds the amount of the share capital actually paid by such shareholder.

An exemption applies for outbound payments of dividends received by a company in scope in respect of titles listed on any recognised stock exchange.

Anti-abuse provisions are in place as outlined hereinbelow.

Interest

The amendments introduce a differentiation in treatment between interest paid to companies that are tax resident or organised in an EU blacklisted jurisdiction and interest paid by a Cyprus company to a company resident or organised in a low-tax jurisdiction. The recipient in scope also includes permanent establishments.

Interest payments carried out by an individual are not caught by the defensive measures.

Interest payments to companies in EU blacklisted jurisdictions
Interest payments to companies that are tax residents in an EU blacklisted jurisdiction or are incorporated in an EU blacklisted jurisdiction and are not residents of a country which is not an EU blacklisted jurisdiction will carry a withholding tax of 17% in accordance with the Special Defence Contribution Law.

Interest payments to companies in low-tax jurisdictions
Interest payments to companies that are tax residents in a low-tax jurisdiction or are incorporated in a low-tax jurisdiction and are not residents of a country which is not a low-tax jurisdiction will not be deductible as an expense at the level of the Cyprus paying company.

An exemption from all the aforementioned rules applies for outbound payments of interest received or credited to a company in scope in respect of titles listed on any recognised stock exchange.

Anti-abuse provisions are in place as outlined hereinbelow.

Royalties

The amendments introduce a differentiation in treatment between royalties paid to companies that are tax resident or organised in an EU blacklisted jurisdiction and royalties paid by a Cyprus company to a company resident or organised in a low-tax jurisdiction. The recipient in scope also includes permanent establishments.

Royalty payments carried out by an individual are not caught by the defensive measures.

Royalty payments to companies in EU blacklisted jurisdictions
Royalty payments to companies that are tax residents in an EU blacklisted jurisdiction or are incorporated in an EU blacklisted jurisdiction and are not residents of a country which is not an EU blacklisted jurisdiction will carry a withholding tax of 10% in accordance with the Income Tax Law.

Royalty payments to companies in low-tax jurisdictions
Royalty payments to companies that are tax residents in a low-tax jurisdiction or are incorporated in a low-tax jurisdiction and are not residents of a country which is not a low-tax jurisdiction will not be deductible as an expense at the level of the Cyprus paying company.

Anti-abuse provisions are in place as outlined hereinbelow.

Common Provisions

Minimum percentage holding

The defensive measures (i.e. the WHT or the non-deductibility of the payment, as the case may be) will be applicable to payments by a Cyprus tax resident company to a recipient in scope if the recipient is a related party (via a 50% capital/voting/profit entitlement threshold, owned directly or indirectly, on its own or together with associated parties).

Payments to Permanent Establishments
WHT would also apply in respect of dividend, interest and royalty payments to permanent establishments established by a company that is not a Cyprus tax resident, in EU blacklisted or low-tax jurisdictions unless the head office of the relevant company is resident in a jurisdiction that is not a low-tax or an EU blacklisted jurisdiction and:

• the payment to the permanent establishment is subject to tax and not exempted in the jurisdiction in which the relevant company is a tax resident; or
• the payment to the PE is subject to tax at the minimum corporate tax rate of 15% under the Pillar 2/Global Minimum Tax Rules.

Anti-abuse provisions
Anti-abuse provisions have been set in place to ignore an arrangement or series of arrangements that have been put in place with the principal purpose or one of the principal purposes of avoiding the imposition of withholding and/or non-deductibility and where such arrangement or series of arrangements are not put into effect for valid commercial reasons reflecting economic reality.
The parameters for assessing the anti-abuse provisions have been set out in a disclosure issued by the Cyprus Tax Commissioner and published in the Official Gazette of the Republic.
According to the disclosure, any company which pays interest, dividend or royalty income to another company (caught by the provisions as explained above) will need to inform the Tax Commissioner of the entering into such transactions and certify that the receiving company meets at least 5 out of the 6 following requirements:

1. At least one of the members of its Board of Directors:
   1.1. has the qualifications and authority to take decisions in relation to the activities, assets or rights that generate the company's revenue; and
   1.2. carries out its duties actively and independently;
2. At least one of its decision-making members of its board of directors resides in the jurisdiction in which the receiving company is resident for tax purposes (or at a distance that allows travel on a daily basis);
3. Has at its disposal office premises, in which its directors and employees perform their duties, in the jurisdiction in which the receiving company is resident for tax purposes;
4. The majority of its board meetings are held in the jurisdiction in which it is resident for tax purposes;
5. Its operating expenses (including directors' remuneration and personnel costs) paid to persons within the jurisdiction in which it is resident for tax purposes for the tax year to which the transactions relate are proportionate to its activities;
6. The group of companies of which it is a member is not structured in such a way that the receiving company has as its sole activity the receipt of interest, dividend or royalty income and the transfer of all or almost all of it, very soon after receipt, to another affiliated company, with the result that it makes only an insignificant taxable profit in order to allow the flow of funds to the beneficial owner.

The Cyprus paying company will maintain relevant supporting evidence with respect to the receiving company for a period of at least six (6) years from the end of the tax year to which the transactions relate.
Where the conditions set forth in such disclosure are not met (and the receiving company does not meet two or more of the above hallmarks), the aforementioned defensive measures shall apply, unless the company demonstrates that such arrangement or series of arrangements came into force for valid commercial reasons reflecting economic reality and that obtaining a tax advantage was not the sole purpose of the arrangement or series of arrangements.

Payments to the following companies are exempted from the conditions stipulated in the disclosure:

• Cyprus tax resident companies;
• Companies that are tax resident in EU/EEA countries;
• Companies that are part of an MNE group subject to tax at the minimum corporate tax rate of 15% under the Pillar 2/Global Minimum Tax Rules;
• Companies that are part of a consolidated group for accounting purposes and that do not have a presence in either EU blacklisted or low-tax jurisdictions.

It should be noted that the Cyprus Tax Authorities retain the discretion to request a confirmation of compliance with the retention and record-keeping requirements stipulated in the disclosure and impose administrative penalties in case of the taxpayer not submitting information requested within a 60-day period.

Impact on Double Tax Treaty