The Cyprus Advantage – November 2025

Cyprus Introduces New Defensive Tax Measures

The Cyprus Parliament has passed amendments to the tax legislation, introducing new defensive measures and strengthening existing ones regarding payments of dividends, interest, and royalties to companies in low-tax and/or EU-blacklisted jurisdictions.

These amendments fulfil Cyprus’s commitments under the EU Recovery and Resilience Plan, which requires the introduction of withholding taxes on outbound payments to low-tax jurisdictions. For interest and royalties, Cyprus opted for non-deductibility instead of withholding tax.

The measures must be carefully assessed to understand their impact on cross-border structures and to plan mitigating actions where needed.

Effective 1 January 2026:

• Dividends: Payments by Cypriot tax-resident companies to associated entities in low-tax jurisdictions will be subject to a 17% withholding tax.
• Interest and Royalties: Payments to associated entities in low-tax jurisdictions will be non-deductible for corporate tax purposes, even if incurred for taxable income generation.

These are in addition to existing provisions for EU-blacklisted jurisdictions (17% on dividends and interest, 10% on royalties). The scope of these existing rules will broaden from 16 April 2025, aligning Cyprus with OECD and EU standards.

A General Anti-Abuse Rule (GAAR) now applies to arrangements lacking commercial substance and primarily aimed at obtaining tax advantages. If substance cannot be proven and documented for six years, the defensive measures will apply.

The Interest Limitation Rule aims to prevent profit shifting and tax base erosion through excessive interest deductions, often used by companies in low-tax jurisdictions financing related entities in high-tax ones.

The rule limits the deductibility of exceeding borrowing costs (EBCs) to 30% of EBITDA, subject to a €3,000,000 de minimis threshold. EBCs represent the excess of deductible borrowing costs over taxable interest and equivalent income. Borrowing costs include all interest-related expenses and financing costs.

For EBITDA calculation, tax-exempt income and carried-forward losses are excluded. The rule applies to both Cypriot tax resident companies and non-residents with a permanent establishment in Cyprus. For groups (75% participation), the rule and threshold apply at the group level.

Exemptions include:

• Standalone entities not part of a group and without 25% ownership links. • Financial undertakings, such as banks, insurers, pension funds, AIFs, and UCITS.

• Grandfathered loans concluded before 17 June 2016.

• EU public infrastructure projects, in the public interest.

EBCs disallowed in one year may be carried forward for up to five years, as can unused interest capacity, though the €3M exception cannot.

An equity escape provision allows full EBC deduction if the company’s equity-to-asset ratio equals or exceeds that of its consolidated group (with up to a 2% tolerance), provided assets and liabilities are valued consistently with IFRS.

A common tax planning strategy shifts profits from high-tax jurisdictions to subsidiaries in low-tax jurisdictions to reduce overall group tax liability. The CFC rule aims to prevent this by reattributing the income of the subsidiary to the parent company and taxing it in the parent’s jurisdiction.

The Rule:

Non-distributed income of a company qualifying as a CFC, derived from non-genuine arrangements primarily intended for tax advantage, must be included in the taxable income of the Cypriot-resident entity controlling the CFC. Only income linked to assets and risks managed by the Cypriot entity’s significant people functions is included.

Definitions:

CFC: A non-Cypriot entity or foreign PE whose profits are not taxed or are exempt in Cyprus, controlled directly or indirectly by a Cypriot entity with over 50% voting rights, capital, or profit entitlement, and paying less than 50% of Cyprus tax.

Non-distributed income: After-tax profit not distributed to the Cypriot controlling entity within the tax year plus 7 months. Non-genuine arrangements: Situations where the CFC does not own assets or bear risks generating income except under the control of the Cypriot entity performing the relevant significant functions.

Exemptions & Double Taxation: The rule does not apply to small profits (€750,000) or low non-trading income (€75,000) or if profits ≤10% of operating costs. Double taxation is avoided via deductions or foreign tax credits for distributed CFC profits previously included in the Cyprus tax base.

In order to address aggressive tax practices not covered by specific provisions, the ATAD introduces a general anti-abuse rule (GAAR). The GAAR targets non-genuine arrangements whose main purpose is to obtain a tax advantage.

The Rule:

Under the GAAR, an arrangement or series of arrangements that are non-genuine, and whose main purpose (or one of the main purposes) is to secure a tax advantage that defeats the object or purpose of the applicable tax law, shall be disregarded when calculating corporate tax liability. An arrangement may consist of multiple steps or parts. When the GAAR applies, the tax liability is calculated according to the provisions of the Cyprus Income Tax Law.

Non-Genuine Arrangements:

For GAAR purposes, an arrangement (or series of arrangements) is considered non-genuine to the extent that it is not established for valid commercial reasons reflecting economic reality.

As part of defensive tax measures, a general anti-abuse rule has been introduced, allowing the tax authorities to disregard arrangements that lack commercial reasoning or economic reality and whose main (or one of the main) purposes is to obtain a tax advantage by circumventing these measures.

The rule aims to prevent the interposition of related companies that, while not tax resident in an NCJ, lack sufficient commercial substance or justification for being interposed between a Cypriot company and an associated entity in an NCJ.

Two decrees by the Council of Ministers (one under the CIT Law and another under the SDC Law) clarify the application of this rule. For dividend, interest, or royalty payments by a Cypriot company to an associated entity in a non-NCJ jurisdiction where no tax is withheld, the Cypriot payer must retain, for at least six years, documentation proving that the recipient company meets at least five of the following six substance criteria:

1. Qualified and independent decision-making by at least one board member.
2. At least one decision-maker resides in the company’s tax jurisdiction.
3. The company maintains office premises in its tax jurisdiction.
4. Most board meetings are held where the company is tax resident.
5. Operational expenses in the jurisdiction are proportionate to activities.
6. The structure does not merely channel income with minimal profit retention.

• No income tax: Non-resident beneficiaries are exempt from income tax on foreign-sourced income.
• No capital gains tax: Gains from the disposal of assets held in trust are not subject to capital gains tax, allowing flexibility in managing investments.
• No inheritance tax: Cyprus has abolished inheritance tax, enabling smooth and tax-efficient wealth transfers across generations.
• No withholding tax: Trust distributions to beneficiaries are free from withholding tax, allowing income to flow without unnecessary deductions.

• Reside in Cyprus for at least 60 days during the tax year;
• Carry out business, are employed, or hold an office (e.g. directorship) in a Cyprus-resident entity at any time during the year;
• Maintain a permanent residence in Cyprus (owned or rented); and
• Are not tax residents in any other country and do not stay in any other country for over 183 days in total during the same year.

Banking in Cyprus Banking in Cyprus has a complex history, shaped by a dramatic crisis and a remarkable transformation. The Cypriot banking sector has emerged from that period leaner, stronger, and far more resilient.

Although it no longer functions as a high-risk, high-liquidity offshore hub, it has successfully repositioned itself as a credible and well-regulated European financial centre.

Today, Cyprus stands as an attractive destination for international businesses and individuals — particularly those with genuine economic activity in or through the island — who value the blend of EU regulatory security, a favourable tax environment, and high-quality professional services.