Cyprus tax legislation includes specific anti-avoidance provisions targeting payments made to companies resident in low tax jurisdictions and EU non-cooperative (blacklisted) jurisdictions.
These rules are particularly relevant for Cyprus companies making cross-border payments such as dividends, interest and royalties, and form part of the broader Cyprus tax reform framework aimed at preventing profit shifting and ensuring alignment with international standards.
1. List of low tax jurisdictions – 2026
The Cyprus Tax Department issues circulars identifying the jurisdictions treated as low tax jurisdictions for Cyprus tax purposes.
Based on the relevant circular, the following jurisdictions are included in the list of low tax jurisdictions for 2026:
- Anguilla
- Vanuatu
- Bermuda
- British Virgin Islands
- Guernsey
- Cayman Islands
- Turks and Caicos Islands
- Isle of Man
- Bahamas
- Bahrain
- Jersey
The relevant list is determined by the applicable circular of the Cyprus Tax Department and should be reviewed each year together with any subsequent updates.
2. Scope of application
The withholding tax provisions apply only to payments made to connected companies, meaning that the foreign recipient must hold, directly or indirectly, at least 50% of the share capital or voting rights of the Cyprus company.
Both of the following conditions must be met:
- The foreign company is connected (holding of at least 50%), and
- The company is resident in a low tax jurisdiction or an EU blacklisted jurisdiction
A participation of exactly 50% falls within the scope of the rules, while a participation below 50% does not.
These provisions apply to direct payments to the immediate recipient, subject to the relevant anti-abuse framework.
3. Low tax jurisdictions and tax implications
Low tax jurisdictions for Cyprus tax purposes are determined by reference to circulars issued by the Cyprus Tax Department, which specify the jurisdictions treated as low tax jurisdictions for the purposes of the relevant provisions.
Although Cyprus tax legislation refers to jurisdictions with significantly lower taxation (generally below 50% of the Cyprus corporate tax rate), the practical application of the rules is based on the jurisdictions explicitly listed in the relevant circulars.
Tax treatment (from 1 January 2026)
For payments to connected companies resident in jurisdictions included in the relevant circular:
- Dividends: 5% withholding tax
- Interest: No withholding tax, but the expense is not deductible for Cyprus tax purposes
- Royalties: No withholding tax, but the expense is not deductible for Cyprus tax purposes
4. EU blacklisted jurisdictions and tax implications
A jurisdiction is considered an EU blacklisted jurisdiction for Cyprus tax purposes where it is included in the EU list of non-cooperative jurisdictions:
- at the time of the transaction, and
- also in the EU list applicable for the previous calendar year
Withholding tax (from 16 April 2025)
For payments to connected companies resident in EU blacklisted jurisdictions:
- Dividends: 17% withholding tax
- Interest: 17% withholding tax
- Royalties: 10% withholding tax
These provisions apply where the jurisdiction is classified as non-cooperative under EU rules and the relevant conditions are met.
5. Substance and commercial rationale
The application of the above provisions also depends on whether the receiving company demonstrates sufficient economic substance and whether the arrangement reflects valid commercial reasons.
The Cyprus paying company is required to:
- maintain supporting documentation
- demonstrate that the foreign company has real economic activity
- support the commercial rationale of the arrangement
In practice, exemption from the defensive measures may apply where the receiving company satisfies the substance criteria (generally based on a “5 out of 6” test) and the arrangement reflects genuine economic activity and valid commercial reasons.
For the purposes of assessing economic substance, the following criteria are typically considered:
- Independent decision-making: at least one qualified board member actively making decisions
- Local presence: decision-maker located in the jurisdiction
- Physical presence: office or infrastructure in place
- Local management: board meetings held in the jurisdiction
- Operational expenditure: costs proportionate to activities
- No conduit structure: not merely passing income to another entity
If 5 out of 6 tests are not met, withholding tax or denial of tax deductions may apply.
6. Practical implications for Cyprus companies
Cyprus companies engaging in transactions with entities located in low tax or EU blacklisted jurisdictions should consider:
- potential withholding tax exposure on dividend payments
- denial of deductions for interest and royalty payments
- increased scrutiny by the Cyprus Tax Department
- impact on international structuring and group financing
Each case must be analysed based on its specific facts and circumstances.
Important note on withholding tax rates
Under the current Cyprus tax framework:
- Payments to EU blacklisted jurisdictions may trigger withholding tax of up to 17% (dividends and interest) and 10% (royalties)
- Payments to low tax jurisdictions are subject to 5% withholding tax on dividends, while interest and royalties are not deductible for tax purposes
These rules form part of Cyprus anti-avoidance provisions targeting profit shifting to low or non-cooperative jurisdictions.
How can we help
Please contact us if you require assistance in assessing the tax implications of cross-border payments, reviewing group structures, or ensuring compliance with Cyprus withholding tax rules.
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Disclaimer: The above information is provided for general guidance only. It does not constitute legal or tax advice. Always consult a qualified professional for advice tailored to your specific circumstances.
Technical review by Kypros Kyprianou, FCCA (view profile)
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