Legislation passed by the Cyprus House of Representatives on 10 April 2025 targets payments made to low-tax jurisdictions and non-cooperative jurisdictions. The legislation introduces a comprehensive set of defensive measures against payments made to entities resident in low-tax jurisdictions over and above existing measures relating to payments made to entities resident in countries included on the EU list of non-cooperative jurisdictions (EU blacklist).
Low-tax jurisdictions are those with a corporate tax rate that is lower than 50% of Cyprus' 12.5% corporate tax rate. Blacklist jurisdictions are those included on the EU blacklist at the time of the relevant transaction and in the previous calendar year.
The new measures are as follows:
The defensive measures repeal the framework applicable to blacklist jurisdictions and replace it with a broader and more robust regime that extends to low-tax jurisdictions. The rules impose a combination of withholding tax and expense disallowance rules depending on the nature of the payment and the classification of the jurisdiction, as illustrated in the following table:
The defensive measure will apply where the recipient of the income is an associated company registered in a blacklist or low-tax jurisdiction—depending on the type of payment—unless it is tax resident in a jurisdiction that is not a blacklist or low-tax jurisdiction.
The law includes a definition as to when a person is considered associated with another person. Generally, any entity in which there is a direct or an indirect relationship in which one entity holds or controls at least 50% of the capital or voting capital of the other entity is considered an associate.
The rules extend to payments made to permanent establishments (PEs) in blacklist or low-tax jurisdictions regardless of whether the PE is maintained by a company that is not in a blacklist/low-tax jurisdiction. Certain exceptions apply.
General Anti-Abuse Rule (GAAR)
A GAAR is embedded into the framework to counteract arrangements lacking commercial substance that are primarily designed to circumvent the application of the defensive withholding tax and expense disallowance measures. Essentially, the GAAR aims to combat the use of interposed entities that are not in a blacklist/low-tax jurisdiction but lack commercial substance and commercial justifications. The Council of Ministers is expected to issue a decree providing additional information and details on the GAAR.
Treaty Renegotiation Provisions
Cyprus will renegotiate double tax treaties with countries that are low-tax jurisdictions or included on the EU blacklist that do not grant taxing rights that allow the imposition of withholding tax in Cyprus as stipulated in the amendments.
Businesses engaged in cross-border activities should assess the impact of the defensive measures on their current structures and transactions and consider steps to mitigate potential risks and exposure. For example:
Angelos Petrou
BDO in Cyprus
Low-tax jurisdictions are those with a corporate tax rate that is lower than 50% of Cyprus' 12.5% corporate tax rate. Blacklist jurisdictions are those included on the EU blacklist at the time of the relevant transaction and in the previous calendar year.
The new measures are as follows:
- The 17% dividend withholding tax currently applicable to blacklist jurisdictions will also be applicable to entities resident in low-tax jurisdictions.
- Interest and royalty payments made to associated companies in low-tax jurisdictions will not be deductible for corporate tax purposes.
- A general anti-avoidance rule (GAAR) will operate to disregard transactions that lack a valid commercial purpose.
Overview of the New Rules
The defensive measures repeal the framework applicable to blacklist jurisdictions and replace it with a broader and more robust regime that extends to low-tax jurisdictions. The rules impose a combination of withholding tax and expense disallowance rules depending on the nature of the payment and the classification of the jurisdiction, as illustrated in the following table:| Payment Type | Jurisdiction Type | Measure | Effective Date | |
| Dividends | BLJ | 17% WHT | In effect | |
| Interest | BLJ | 17% WHT | In effect | |
| Royalties | BLJ | 10% WHT | In effect | |
| Dividends | LTJ | 17% WHT | 1 January 2026 | |
| Interest | LTJ | Deduction disallowance | 1 January 2026 | |
| Royalties | LTJ | Deduction disallowance | 1 January 2026 | |
The defensive measure will apply where the recipient of the income is an associated company registered in a blacklist or low-tax jurisdiction—depending on the type of payment—unless it is tax resident in a jurisdiction that is not a blacklist or low-tax jurisdiction.
The law includes a definition as to when a person is considered associated with another person. Generally, any entity in which there is a direct or an indirect relationship in which one entity holds or controls at least 50% of the capital or voting capital of the other entity is considered an associate.
The rules extend to payments made to permanent establishments (PEs) in blacklist or low-tax jurisdictions regardless of whether the PE is maintained by a company that is not in a blacklist/low-tax jurisdiction. Certain exceptions apply.
General Anti-Abuse Rule (GAAR)
A GAAR is embedded into the framework to counteract arrangements lacking commercial substance that are primarily designed to circumvent the application of the defensive withholding tax and expense disallowance measures. Essentially, the GAAR aims to combat the use of interposed entities that are not in a blacklist/low-tax jurisdiction but lack commercial substance and commercial justifications. The Council of Ministers is expected to issue a decree providing additional information and details on the GAAR.
Treaty Renegotiation Provisions
Cyprus will renegotiate double tax treaties with countries that are low-tax jurisdictions or included on the EU blacklist that do not grant taxing rights that allow the imposition of withholding tax in Cyprus as stipulated in the amendments.
BDO Insights
Businesses engaged in cross-border activities should assess the impact of the defensive measures on their current structures and transactions and consider steps to mitigate potential risks and exposure. For example:
- Understand the scope and impact of the rules and the substance requirements under the GAAR;
- Review the group structure, existing intragroup financing and intellectual property licensing arrangements to evaluate exposure to potential withholding tax or the disallowance of expense deductions and the likely impact on existing and future cash flows;
- Confirm adequate documentation to justify the commercial substance of associated entities that are contracting with a Cyprus entity, especially where the group includes entities in blacklist jurisdictions/low-tax jurisdictions, irrespective of whether or not the Cyprus entity transacts with those entities; and
- Anticipate tax treaty changes that may alter the treatment of payments under current tax treaty protections.
Angelos Petrou
BDO in Cyprus