In April 2025, Cyprus enacted a set of important amendments to its tax legislation through the Income Tax (Amending) Law L.47(I)/2025, the Special Defence Contribution (Amending) Law L.48(I)/2025, and the Collection of Taxes (Amending) Law L.49(I)/2025. These changes strengthen the country's tax framework by introducing clear definitions, enhancing enforcement measures and aligning Cyprus more closely with international and EU standards.
At the heart of the amendments lies the clarification of what constitutes a "low-tax jurisdiction" and how transactions with "non-cooperative jurisdictions" (blacklisted jurisdictions) are to be treated. Together, these reforms provide greater certainty while imposing stricter compliance obligations on taxpayers with cross-border operations.
Low-Tax Jurisdictions – Article 11(17) of the Income Tax Law (L.47(I)/2025)
For the first time, Cyprus law provides a measurable test for identifying a low-tax jurisdiction. According to the definition provided in the amended Income Tax Law, a jurisdiction is classified as low-tax if its corporate tax rate is lower than 50% of the corporate income tax rate applicable in Cyprus. With the Cyprus corporate tax rate fixed at 12.5%, this means that any jurisdiction taxing profits at less than 6.25% falls within this definition.
The consequences of this new definition are significant. From 1 January 2026, payments of interest and royalties made to related parties in low-tax jurisdictions will not be deductible in Cyprus. The restriction applies where there is a connection of at least 50% in capital, voting rights or entitlement to profits between the payer and the recipient.
This provision ensures that Cyprus does not grant tax deductions for outflows to jurisdictions with minimal taxation, unless those outflows have already suffered Cyprus tax. Indeed, Article 11(17) makes clear that no deduction is denied where the same payment is subject to Cyprus withholding tax or the Special Defence Contribution (SDC), preventing double taxation.
Non-Cooperative Jurisdictions and Article 21A of the Income Tax Law (L.47(I)/2025)
The amendments also introduce a new Article 21A into the Income Tax Law, which deals specifically with non-cooperative jurisdictions – those listed in the European Union's blacklist of non-cooperative jurisdictions for tax purposes. As of October 2024, this list comprises 11 countries: American Samoa, Anguilla, Fiji, Guam, Palau, Panama, Russia, Samoa, Trinidad and Tobago, US Virgin Islands, and Vanuatu.
Under Article 21A, any payment of royalties or similar income from intellectual property to a recipient located in a non-cooperative jurisdiction is subject to a withholding tax of 10%. The provision applies to companies and other legal entities, as well as to payments routed through permanent establishments situated in such jurisdictions, subject to certain exceptions.
This rule is distinct from the treatment of low-tax jurisdictions. While Article 11(17) focuses on deduction denial for interest and royalty payments to low-tax jurisdictions, Article 21A directly imposes a 10% withholding tax on IP-related income when the recipient is based in a blacklisted jurisdiction.
Dividends and Interest – Article 3(2)(a1) and (b1) of the SDC Law (L.48(I)/2025)
The Special Defence Contribution Law has also been amended to strengthen the taxation of outbound payments to non-cooperative jurisdictions. Specifically, Article 3(2)(a1) and (b1) now provide that dividends and certain types of interest paid by Cyprus tax residents to recipients in non-cooperative jurisdictions are subject to the Special Defence Contribution at the rate of 17%.
These provisions close a long-standing gap where distributions to entities in blacklisted jurisdictions could potentially escape Cyprus taxation. By imposing the SDC, Cyprus ensures that dividends and interest flowing to such jurisdictions bear a Cyprus tax cost, consistent with international tax policy trends.
Compliance and Article 50H of the Collection of Taxes Law (L.49(I)/2025)
The changes are supported by new compliance obligations introduced into the Collection of Taxes Law, in particular Article 50H. This provision requires taxpayers to confirm, in their annual tax return, compliance with decrees of the Council of Ministers governing transactions with low-tax and non-cooperative jurisdictions.
In addition, taxpayers must be able to provide supporting documentation when requested by the Tax Department. Failure to provide such documentation within the statutory deadlines may result in escalating administrative fines, reaching up to €10,000.
These obligations emphasise that Cyprus is not only tightening the substantive rules on cross-border payments, but also demanding greater transparency and accountability from taxpayers.
Effective Dates and Practical Impact
The provisions relating to non-cooperative jurisdictions are already in force, following publication of the amending laws in April 2025. By contrast, the provisions targeting low-tax jurisdictions under Article 11(17) of the Income Tax Law and the related provisions of the SDC and Collection of Taxes Laws will take effect from 1 January 2026.
For businesses, the practical impact is clear. Interest and royalty flows to related parties in low-tax jurisdictions will cease to be deductible in Cyprus from 2026, unless taxed locally. Payments of dividends, interest and royalties to entities in non-cooperative jurisdictions will now bear Cyprus withholding tax or SDC, with treaty suspension mechanisms available where necessary. Companies must also ensure their compliance procedures and documentation are robust to avoid penalties.
Conclusion
These amendments represent a decisive step by Cyprus in reinforcing its position as a credible and transparent international business centre. By clearly defining low-tax jurisdictions with an objective percentage, introducing a 10% withholding tax on IP payments to blacklisted jurisdictions through Article 21A, imposing SDC on dividends and interest under Article 3(2)(a1) and (b1), and enhancing compliance obligations under Article 50H, Cyprus has modernised its tax framework in line with EU and OECD standards.
Businesses with cross-border structures involving low-tax or blacklisted jurisdictions should act now to assess the potential impact, restructure where necessary, and prepare for the more stringent compliance environment that will apply from January 2026.
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.
