Cyprus Amendments On Tax Rules On Low-Tax And Blacklisted Jurisdictions

On 10 April 2025, the Cyprus House of Representatives approved amendments to the Cyprus tax legislation by voting defensive measures against low-tax jurisdictions (LTJs) and EU "blacklisted" jurisdictions (BLJs). The amendments with respect to LTJs will enter into force as from 1 January 2026 while the amendments regarding BLJs are already in force as of 16 April 2025.

The new legislations impose a combination of Withholding Tax (WHT) and restrictions of expenses depending on the nature of the payment and classification of the jurisdiction.

As per new legislation, any dividend, interest or royalty income to associate companies in LTJs will incur a 17% WHT. In addition to this, interest and royalty payments to associate companies in LTJs will not be accepted as deductions for corporate tax purposes at the level of the Cypriot paying companies, irrespectively of whether these expenses were incurred wholly and exclusively for the generation of taxable income.

The defensive measures also revoke the existing frameworks applicable to BLJs and replace it.

Black-listed jurisdictions (BLJs) are those included in the EU list of non-cooperative jurisdictions at the time of the transactions and in the previous calendar year.

Low-tax jurisdictions (LTJs) are the jurisdictions with a corporation tax rate that is lower than 50% of the Cyprus's corporate tax rate of 12.5%, this means any jurisdiction with a tax rate that is below 6.25%.

Summary and Application of the new rules:

In which cases will the new rules be applicable?

The new provisions will be applicable in the cases where the recipient receiving the interest/dividend/royalty income, is an associate company registered in a BLJ or a LTJ and is not a tax resident in a jurisdiction that is not a BLJ or LTJ.

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 associate company is a company that has a direct or indirect relationship with the Cypriot company that exceeds 50% (shares, or voting rights, or rights to profits) either alone or together with other associated persons.

Interest payments carried out by an individual are out of the scope of the defensive measures.

General Anti-Abuse Rule:

A general anti-abuse rule (GAAR) has been introduced in the legal framework, to counter arrangements lacking commercial substance and whose main purpose is to obtain a tax advantage. An anti-abuse mechanism is set to counteract arrangements which lack commercial substance that are primarily designed to avoid the application of the defensive measures. In such cases, and unless the taxpayer can demonstrate (and retain supporting documentation for 6 years) that the recipient company has sufficient substance, the relevant arrangements will be disregarded, and the defensive measures will apply.

Penalties

The tax authorities reserve the right to request, via written notification, from the Cypriot paying company to provide a detailed statement including full data of the relevant arrangements, and/or submission of information and documentation to support that the recipient company satisfies at least five out of the six substance requirements. Failure to disclose the required documentation within 60 days from receipt of the written notification will result in the imposition of administrative penalties as follows:

• Period 61-90 days – €2,000
• Period 91-120 days -€4,000
• Period that exceeds 121 days or complete non-compliance – €10,000

The degree states that in case no WHT is applied to such jurisdictions, the taxpayer must retain supporting evidence for a period of six years from the end of the relevant tax year.

Next steps:

Decrees are expected to be issued with more details and information in respect to the above changes. Documents and reporting requirements of the relevant paying entities in Cyprus are expected to be released.

Businesses that are associates and engage in cross-border activities with LTJ and BLJ should assess the impact that the defensive measures will have on their business. Key matters to consider are listed below:

1. Understanding the features of the new rules and how they may impact their cash flow
2. Reviewing the ownership structure to determine if any of the shareholder companies may fall within the new rules and whether dividend WHT could apply to them
3. Ensuring that documentation of commercial substance for payments made to associates companies in jurisdictions that are not BLJs or LTJs are in place.

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.