The Republic of Cyprus has adopted a new set of protective tax measures aimed at enhancing tax transparency and safeguarding the integrity of its tax base. These measures have been introduced under Law 47(I)/2025, which was published in the Government Gazette of the Republic on 16 April 2025.
The law introduces rules on the non-deductibility of certain expenses (such as interest and royalty payments) and withholding tax obligations on outbound payments made by Cyprus tax resident companies to associated entities located in low-tax jurisdictions or non-cooperative jurisdictions, as defined under relevant European tax policy criteria.
These changes form part of Cyprus's commitment under its Recovery and Resilience Plan, and reflect a shift in the approach to the tax treatment of cross-border transactions, with an emphasis on those involving related parties outside the Republic.
Scope of the new measures
The new tax measures introduced by Law 47(I)/2025 apply to specific categories of payments made by Cyprus tax resident companies, to associated entities established in third-country jurisdictions. The purpose of these measures is to limit the ability of taxpayers to shift profits or deduct expenses through aggressive measures involving entities located outside the framework of international cooperation and tax transparency, as defined by the European Union.
Covered payments:
- Dividends
- Interest
- Royalties
The measures apply either through the imposition of withholding tax or the denial of deductibility, depending on the type of payment and the classification of the recipient's jurisdiction.
Jurisdictions affected:
- Low-Tax Jurisdictions (LTJs):
Third-country jurisdictions with a corporate income tax rate lower than 50% of the applicable Cyprus rate (i.e., currently below 6.25%).
- Non-Cooperative Jurisdictions (NCJs):
Third-country jurisdictions included in Annex I of the EU list of non-cooperative jurisdictions for tax purposes, either at the time of the transaction or during the preceding calendar year. (View the official EU list here)
Relationship between payer and recipient:
The measures only apply when there is an "associated relationship" between the Cyprus company and the payment recipient.
Under the law, two entities are considered associated when:
- One holds, directly or indirectly, more than 50% of the share capital, voting rights, or profit entitlement of the other; or
- The same natural or legal persons hold that percentage in both entities.
- A third person and their associated persons (either natural or legal) jointly hold more than 50% in both entities, directly or indirectly.
In the case of individuals, association may also arise based on close family ties, including relationships up to the third degree of kinship.
Permanent establishments (PEs):
The rules also apply to payments made to permanent establishments of associated entities located in LTJs or non-cooperative jurisdictions, even if the main entity is not a tax resident of such a jurisdiction, provided the payment is effectively attributed to the relevant PE.
Tax treatment by type of payment
Dividends
Dividend payments made by Cyprus-resident companies to associated companies that are tax residents of either NCJs or LTJs, are subject to a 17% withholding tax, in accordance with the provisions of the Special Contribution for the Defence Law.
The withholding applies only if the following conditions are met:
- There is an association exceeding 50% between the entities involved, and
- The recipient is not a tax resident of any jurisdiction other than an LTJ or a non-cooperative jurisdiction.
Interest
Interest payments made by Cyprus-resident companies to associated companies that are tax residents of:
- NCJs are subject to a 17% withholding tax, in accordance with applicable legislation.
In contrast, in the case of associated companies that are tax residents of:
- LTJs, the law provides that such interest payments are not deductible for corporate income tax purposes.
Royalties
Royalty payments made by Cyprus-resident companies to associated companies that are tax residents of:
- NCJs are subject to a 10% withholding tax, in accordance with the applicable legislation.
In the case of associated companies that are tax residents of:
- LTJs, the law provides that such royalty payments are not deductible for corporate income tax purposes.
It is noted that the legislation provides for an exemption from the application of the defensive measures in cases where the associated recipient entity, even if resident in an LTJ, effectively remains subject to a corporate income tax rate of at least 15%.
This exemption applies across the board and covers payments of dividends, interest and royalties, ensuring that the measures do not apply indiscriminately, but rather do not apply for cases where there is substantive taxation in line with the OECD's Pillar II framework.
General Anti-Abuse Rule (GAAR)
Law 47(I)/2025 expressly incorporates a General Anti-Abuse Rule (GAAR) mechanism aimed at preventing the circumvention of the new defensive measures through artificial structures or arrangements lacking commercial substance.
According to the relevant provision, where an arrangement or transaction is implemented with the main purpose of avoiding withholding tax or achieving a tax advantage, and lacks sufficient commercial justification, the Tax Department may disregard such arrangement and apply the law as if it did not exist.
The GAAR applies both to:
- Non-deductible payments to LTJs, and
- Withholding tax obligations on payments to NCJs.
Specifically, it may capture:
- Layered structures involving intermediate entities that are tax residents of third countries not classified as LTJs or NCJs, when those entities lack real operational substance;
- Transactions with no genuine economic rationale, aimed primarily at avoiding the impact of the new measures.
Commercial substance may be demonstrated based on actual economic characteristics such as local presence, employees, operating expenses, and active functions. A relevant Ministerial Decree is expected to further define the applicable substance criteria.
Renegotiation of Double Tax Treaties (DTTs)
The new provisions require that, in cases where a Double Tax Treaty is in force between Cyprus and a jurisdiction classified as an LTJ or NCJ, and the treaty does not grant Cyprus taxing rights over dividend, interest or royalty payments, the Republic is obliged to initiate a renegotiation process within three (3) years.
Entry into force
The framework entered into force upon its publication in the Official Gazette of the Republic on 16 April 2025, with the exception of:
- the provisions on the non-deductibility of payments to LTJs, and
- the treaty renegotiation requirement,
which shall apply as of 1 January 2026.
Conclusion
The new framework of defensive tax measures introduced by the Republic of Cyprus strengthens tax transparency and aligns with the country's European and international commitments. The changes affect the tax treatment of cross-border payments to certain jurisdictions and introduce additional controls through withholding tax, non-deductibility provisions, and general anti-abuse mechanisms, through many of these restrictions were already in place as part of the existing tax laws (e.g. EU blacklist, TP rules, Interest Restriction rules, BO rules, etc.).
Businesses are encouraged to review their transaction structures, reassess relationships with associated entities abroad, and ensure adequate documentation of commercial substance where required.
May 2025
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Tax Department
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