Introduction
In an era where global tax compliance is tightening, Cyprus is stepping up to align its domestic tax framework with international standards. On April 10, 2025, the House of Representatives approved a series of tax amendments designed to curb tax avoidance, particularly through transactions involving low-tax jurisdictions (LTJs) and EU blacklisted jurisdictions (BLJs).
These measures will have far-reaching implications for businesses and investors leveraging Cyprus' tax advantages. Let's explore what's changing, why it matters, and how businesses should respond.
Key Changes in Cyprus Tax Legislation
Withholding Taxes on Outbound Payments:
- Effective April 16, 2025, a 17% withholding tax (Special Defence Contribution) applies to dividends and interest paid to companies based in EU blacklisted jurisdictions.
- Starting January 1, 2026, these rules expand to cover LTJs, defined as jurisdictions with a corporate tax rate less than 50% of Cyprus' 12.5% rate (or future 15% rate if reforms are implemented).
- A 10% withholding tax will apply to royalties paid to LTJs from January 2026.
Non-Deductibility of Certain Payments:
- Interest and royalty payments to associated entities in LTJs will no longer be tax-deductible for Cyprus corporate tax purposes, effective January 1, 2026. This targets structures where payments are routed to low-tax jurisdictions to reduce Cyprus tax liabilities.
General Anti-Abuse Rule (GAAR):
- Cyprus has introduced a GAAR to disregard artificial arrangements lacking commercial substance. This aligns with OECD and EU directives and reflects a broader crackdown on aggressive tax planning.
Implications for International Business
These measures are more than mere formalities:
- Corporate Groups with structures involving LTJs or BLJs must review their payment flows and holding structures to identify exposure to withholding tax.
- Tax Advisors need to reassess intercompany loans, licensing agreements, and management service arrangements that might trigger non-deductibility or withholding taxes.
- Substance is Critical: The introduction of GAAR means companies must ensure their arrangements are defensible based on genuine business reasons, not solely tax advantages.
Conclusion: Strategic Adaptation Required
Cyprus has long been a hub for international business, but its commitment to global tax transparency is reshaping the landscape. Proactive businesses and advisors will need to review structures, strengthen substance, and prepare for the evolving compliance environment.
These changes highlight Cyprus' position as a cooperative jurisdiction, ready to meet global expectations while continuing to offer a robust business platform.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
