Withholding Tax in Cyprus: New Rules for Dividends and Payments to Blacklisted and Low-Tax Jurisdictions (2025–2026)

Cyprus has implemented new withholding tax rules that affect intercompany payments to foreign connected companies, including dividends, interest, and royalties. The rules particularly target situations where the recipient entity is based in a low-tax jurisdiction or a country included in the EU blacklist. These measures form part of Cyprus’s broader tax reform and aim to strengthen tax transparency, align with OECD standards on beneficial ownership, and prevent profit shifting through conduit structures.

The amended provisions came into force on 16 April 2025, except for those concerning low-tax jurisdictions, which will apply from 1 January 2026.

The rules apply prospectively, with two implementation phases depending on the classification of the jurisdiction:

• From 16 April 2025: Payments to jurisdictions included in the EU blacklist.
• From 1 January 2026: Payments to jurisdictions deemed to have low taxation, i.e. where the corporate income tax rate is below 6.25% (this corresponds to 50% of Cyprus’s standard 12.5% corporate tax rate).

The withholding tax applies only to payments made to connected companies, i.e., where the foreign recipient company holds directly or indirectly at least 50% of the Cyprus company.

The provisions aim to prevent profit shifting to companies with minimal substance located in jurisdictions with low or no tax, or that are considered non-cooperative.

Withholding applies only when both conditions are met:

• The foreign company is connected (≥50% holding), and
• It is resident in an EU blacklisted or low-tax jurisdiction.

Ownership of exactly 50% triggers withholding; less than 50% does not.

A jurisdiction is considered blacklisted for these purposes if it appears:

• In the latest published and in-force version of the EU blacklist during the relevant calendar year, and
• In the latest published list of the previous calendar year.

Depending on the jurisdiction type, the tax implications vary:

Payments to EU Blacklisted Jurisdictions (from 16/04/2025):

• Dividends: 17% withholding tax
• Interest: 17% withholding tax
• Royalties: 10% withholding tax

Payments to Low-Tax Jurisdictions (from 01/01/2026):

• Dividends: 17% withholding tax
• Interest: No withholding, but not deductible for tax purposes
• Royalties: No withholding, but not deductible for tax purposes

The Cyprus company must:

• Collect documentation proving the foreign company meets the required substance criteria
• Be able to provide such documentation to the Cyprus Tax Department within 60 days upon request
• Retain the documentation for at least six years

Exemption from withholding is granted if the foreign company satisfies at least 5 out of the following 6 substance criteria:

• Active and Independent Board Member: Has a board member with:
  • the qualifications and authority to make decisions on the activities, assets, or rights generating the company’s income; and
  • who performs their duties actively and independently.
• Local Residence of Decision-Maker: One of the decision-makers must reside (or be able to travel daily) in the company’s jurisdiction.
• Substantial Physical Presence: The company must have a meaningful physical presence (e.g. offices, infrastructure) in its country of residence.
• Local Board Meetings: Board meetings must be held primarily in the country of residence.
• Relevant Operational Expenditure: The company must incur operating expenses (e.g. salaries, rent) that support its business activity.
• Avoidance of Conduit Function: The company should not operate merely as a conduit, i.e. collecting income and almost immediately transferring it to another connected company, retaining only nominal profit (such behaviour does not align with the OECD concept of “beneficial ownership” — i.e. the ability to effectively control and benefit from the income without a legal or contractual obligation to pass it on to a third party).

If the foreign company does not meet at least 5 of the 6 criteria, withholding tax will apply unless:

• The arrangement is shown to serve valid commercial reasons reflecting economic reality, and
• Tax benefit was not the sole purpose of the arrangement or structure.

Tax authorities may also assess whether the company meets at least 2 of the 6 criteria, along with the overall business profile and commercial rationale.

Situation	Withholding Applies	Reason/Comment
5 out of 6 substance criteria met	No	Full economic substance; exemption applies automatically.
2–4 criteria met and valid commercial reason demonstrated	Possibly (at the Tax Department’s discretion)	If the company proves the arrangement serves a real commercial purpose and is not solely for tax advantage, withholding may be waived.
Fewer than 2 criteria met, or no commercial reason demonstrated	Yes	Insufficient substance; defensive measures apply.

Link to Cyprus Tax Reform

Cyprus is currently undergoing a comprehensive tax reform aimed at aligning its tax system with evolving international standards and enhancing its long-term competitiveness. One probable driver behind this reform is the need to introduce and regulate withholding tax mechanisms on outbound payments to connected entities, particularly those involving holding and financing structures. As part of this reform, the Cypriot authorities have indicated that the standard withholding tax on dividends may be set at a reduced rate of 5%, a move designed to balance compliance with international expectations while maintaining Cyprus’s attractiveness as a holding and financing jurisdiction. With proper planning, this measure can work favourably for both Cyprus and multinational groups, for several reasons:

1. The 5% is in addition to the 12.5% corporate tax in Cyprus. However, if the recipient country grants credit for the withholding tax, the group’s total tax burden may remain effectively at 12.5%.
2. In today’s tax landscape, where zero effective taxation is no longer acceptable, a 5% withholding rate is widely seen as moderate and aligned with international practice.
3. In the context of the expected Global Minimum Tax (Pillar II), Cyprus’s approach may offer transparency and predictability to multinational groups seeking compliant, cost-efficient structures.
4. For companies based in low-tax countries that seek EU market access, Cyprus may be a practical option under the new framework.
5. These measures may also pressure non-cooperative or opaque jurisdictions to reform, introducing minimum substance or corporate tax rates.

The law requires Cyprus to re-negotiate any DTTs with blacklisted or low-tax jurisdictions if such treaties do not allocate taxing rights to Cyprus (e.g. for dividends).

If the other country does not agree to amend the DTT:

• The treaty remains in force, but
• Cyprus will apply its domestic anti-abuse measures (i.e. withholding), especially if:
  • substance criteria are not met,
  • no valid commercial purpose is shown,
  • or the income appears to be artificially routed.

Even where a DTT provides 0% withholding, Cyprus reserves the right not to apply the treaty when the anti-abuse conditions are triggered. This approach aligns with:

• OECD recommendations under BEPS Action 6, and
• the EU’s “good tax governance” standards.

Although Cyprus is not an OECD member, it adheres fully to OECD and EU tax transparency and substance principles. Its ability to override treaty benefits based on abuse prevention is considered legitimate and in line with international practice.

If your group includes payments to connected companies abroad — particularly in low-tax or EU blacklisted jurisdictions — you should assess your structure’s substance and compliance.

Contact our team for assistance in documentation, preemptive review, or adjusting your intercompany strategy to align with Cyprus’s evolving withholding tax framework, which forms part of the country’s wider tax reform efforts.

For more details on the broader reform package and its potential impact on businesses, refer to Rightax’s dedicated publication, which was specifically prepared to help businesses navigate the upcoming changes.

 

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The authors expressly disclaim all and any liability and responsibility to any person, entity, or corporation who acts or fails to act as a consequence of any reliance upon the whole or any part of the contents of this publication.

Accordingly, no person, entity, or corporation should act or rely upon any matter or information as contained or implied within this publication without first obtaining advice from an appropriately qualified professional person or firm of advisors, and ensuring that such advice specifically relates to their particular circumstances.