In recent years, Cyprus has undertaken significant tax reforms to enhance transparency, align with international tax standards, and combat harmful tax practices. One of the most notable developments is the introduction of a two-phase withholding tax (WHT) regime on outbound payments to associated entities in high-risk jurisdictions, namely, those included on the EU list of non-cooperative jurisdictions and jurisdictions with very low corporate tax rates. These measures form part of Cyprus's broader strategy to support the global fight against base erosion and profit shifting (BEPS), while safeguarding the jurisdiction's role as an international center for holding, financing, and intellectual property structures. The new WHT rules reflect a shift toward substance-based tax planning and demonstrate Cyprus's ongoing commitment to maintaining tax compliance standards while preserving its business-oriented edge.
Cyprus Implements Defensive Tax Measures in Two Phases
Phase I – Targeting EU blacklisted jurisdictions (2022 amendments)
The first phase of Cyprus's defensive tax regime was enacted through amendments to the Income Tax Law and the SDC Law and came into force on 31 December 2022. This initial package marked a significant policy shift, introducing WHT obligations on certain outbound payments made by Cyprus tax-resident companies to associated entities in jurisdictions listed in Annex I of the EU list of non-cooperative jurisdictions for tax purposes.
The key measures introduced under this first phase were:
- A 17% WHT on dividend payments (applies if recipient holds either alone or jointly with associates >50% of voting rights, capital, or profits in the Cyprus tax resident company)
- A 17% WHT on passive interest payments, effective as of 01 January 2024
- A 10% WHT on royalty payments, including those for rights used outside Cyprus (representing a material shift in policy, as outbound royalties were previously exempt if exploited abroad)
These changes laid the groundwork for a more robust defensive tax framework targeting transactions that could erode the Cyprus tax base through payments to EU blacklisted jurisdictions.
Phase II: Extension to low-tax jurisdictions (2025 amendments)
The second phase of Cyprus's defensive tax regime was enacted through a new legislative package, approved by the House of Representatives on 10 April 2025, and published in the Official Gazette on 16 April 2025. This package includes coordinated amendments to:
- the Income Tax Law (118(I)/2002) (Income Tax Law);
- the Special Defence Contribution Law (117(I)/2002) (SDC Law); and
- the Assessment and Collection of Taxes Law (4/1978) (ACT Law).
These amendments broaden the scope of existing WHT and deductibility rules by introducing a new category of "low-tax jurisdictions" defined under section 2 of the Income Tax Law and SDC Law as jurisdictions with a statutory corporate income tax rate below 6.25% (i.e., less than 50% of Cyprus's 12.5% rate). A jurisdiction applying an effective minimum tax rate of at least 15%, in line with OECD Pillar Two, is excluded from the low tax jurisdiction definition.
Under section 3(2)(α1) of the SDC Law, as amended in 2025, the following WHT rules apply to payments made to associated entities (i.e., entities with >50% ownership/control or close family ties) in low-tax jurisdictions (effective 1 January 2026):
- Dividends are subject to 17% WHT
- Interest and royalty payments are non-deductible for Cyprus tax purposes
- Payments to permanent establishments in low-tax jurisdictions are also captured
These provisions are supported by a general anti-abuse rule (GAAR), which grants the Cyprus tax authorities the power to disregard or recharacterize arrangements that lack commercial substance and appear to be implemented primarily for the purpose of avoiding the application of the new WHT or non-deductibility rules. The GAAR operates as a safeguard to ensure that the defensive tax measures are not undermined through artificial structuring or the interposition of entities in jurisdictions that technically fall outside the definition of a low-tax or EU blacklisted jurisdiction but serve no meaningful economic or operational purpose.
As part of the legislative amendments, a new subsection 34(3) was added to the Income Tax Law. It requires Cyprus to initiate treaty renegotiations within three years where a Double Tax Treaty (DTT) exists with a low-tax or EU blacklisted jurisdiction and does not grant Cyprus taxing rights over dividends, interest, or royalties.
This extension brings low tax jurisdictions into alignment with the blacklisted WHT regime, while also introducing new deductibility restrictions for outbound payments.
Compliance Obligations and Penalties
Under section 50H of the ACT Law, taxpayers are required to retain, and upon request, provide documentation substantiating the tax residency and classification of payment recipients. Failure to comply with these obligations may result in administrative penalties, which escalate based on the period of non-compliance:
- €2,000 (61–90 days)
- €4,000 (91–120 days)
- €10,000 (121+ days)
Policy context and compliance outlook
The 2022 and 2025 amendments mark a phased and strategic evolution of Cyprus's tax policy, underscoring the country's commitment to international tax cooperation and the EU's efforts to combat harmful tax practices. Cyprus generally does not apply WHT on outbound payments in other cases, helping to maintain its competitiveness as a jurisdiction for holding, intellectual property, and financing structures. At the same time, these targeted measures show Cyprus's careful approach, focusing on cross-border transactions that pose a higher risk of tax base erosion while supporting transparency and compliance.
Within this framework, Cyprus's extensive DTT network remains a cornerstone of international tax planning. With more than 65 DTTs currently in force, the network offers taxpayers legal certainty, relief from double taxation, and access to treaty-based dispute resolution mechanisms. This solidifies Cyprus's position as a modern, EU-aligned, and globally integrated tax jurisdiction.
Conclusion
These changes carry significant implications for cross-border structures involving Cyprus, particularly where outbound payments are made to entities in low-tax or EU blacklisted jurisdictions. Businesses are advised to carefully review their existing arrangements against the new rules and ensure timely compliance.
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.
