Cyprus Withholding Tax on Transactions to Related Parties

On 10 April 2025, the House of Representatives of the Republic of Cyprus approved a legislative package introducing robust defensive tax measures aimed at counteracting profit shifting to low-tax jurisdictions (LTJs) and jurisdictions listed as non-cooperative by the European Union (blacklisted jurisdictions or BLJs), focusing on Cyprus withholding tax on dividends paid to related parties in LTJs and BLJs and on denial of tax deductibility of interest and royalty transactions.

These reforms are a key milestone under Cyprus’s Recovery and Resilience Plan and reflect the country’s commitment to enhanced tax transparency, fairness, and alignment with international tax standards.

Overview:
Cyprus withholding tax on dividends and denial of deductibility of interest and royalties to certain related parties

The newly adopted framework is focusing on Cyprus withholding tax to related parties in LTJs and BLJs, on dividends paid to related parties in LTJs and BLJs and on denial of tax deductibility of interest and royalty transactions.:

Withholding Tax (WHT)
A 17% WHT will apply to dividend payments made to associated entities located in either LTJs or BLJs. For interest and royalty payments to associated entities in BLJs, WHT will also apply at the rates of 17% and 10%, respectively. These provisions are already in force for BLJs and will extend to LTJs from 1 January 2026.

Denial of Deductibility
From 1 January 2026, interest and royalty payments made to associated entities in LTJs will no longer be tax-deductible for corporate income tax purposes, representing a significant disincentive for structuring financing or intellectual property arrangements through LTJs.

Definitions and Scope

Blacklisted Jurisdictions (BLJs):
Jurisdictions listed in Annex I of the EU list of non-cooperative jurisdictions for tax purposes, both at the time of the transaction and in the preceding calendar year.
Low-Tax Jurisdictions (LTJs):
Jurisdictions with a statutory corporate income tax rate lower than 50% of Cyprus’s corporate tax rate, i.e., less than 6.25% under the current 12.5% rate.

Associated Enterprises:
An entity is deemed associated if it holds, directly or indirectly, more than 50% ownership or voting rights in the Cypriot entity, or vice versa. The rules also extend to permanent establishments (PEs) situated in BLJs or LTJs, even where the main entity is not located in such jurisdictions.

The rules are designed to capture both direct and indirect payment structures and prevent tax benefits from being claimed through conduit arrangements or interposed entities.

General Anti-Abuse Rule (GAAR)

A General Anti-Abuse Rule has been embedded in the legislation to neutralize artificial or non-genuine arrangements that aim to circumvent the new provisions. Specifically, where entities interposed in non-BLJ/LTJ jurisdictions lack sufficient commercial substance, the defensive measures will still apply. Taxpayers must be able to demonstrate genuine economic activity and business rationale for the structuring of such arrangements.

The Council of Ministers is expected to issue a ministerial decree outlining detailed substance criteria and applicable exceptions in the coming weeks.

Tax Treaty Renegotiation Mechanism

Where Cyprus maintains double tax treaties with jurisdictions classified as LTJs or BLJs that currently restrict Cyprus from applying WHT on relevant payments, the new law obliges the Republic to initiate treaty renegotiations within three years. The objective is to align treaty provisions with the defensive measures and ensure appropriate taxation rights are secured.

Practical Implications of Cyprus Withholding Tax on Dividends and Denial of Deductibility of Interest and Royalty Payments to Related Parties related Parties

Cypriot companies and multinational groups with cross-border structures involving jurisdictions potentially falling within the BLJ or LTJ categories should undertake a thorough review of:

Shareholding and Ownership Chains:
To assess whether dividend distributions may trigger WHT obligations under the new regime.

Intragroup Financing and IP Structures:
As interest and royalty flows to LTJs will become non-deductible, such structures may require redesign or relocation to avoid increased effective tax burdens.

Commercial Substance Requirements: Ensure that entities used in non-BLJ/LTJ jurisdictions meet substance standards and are not merely pass-through vehicles.

Cash Flow Planning:
The imposition of WHT and denial of deductions may significantly impact tax outflows, affecting group-level profitability and financing arrangements.

Treaty Monitoring:
Businesses should track potential treaty renegotiations that may affect the future tax treatment of intercompany payments.

Our Advice, Your Next Steps
Companies are advised to:
Map out existing exposure to the affected jurisdictions.
Assess the need for restructuring of financial, licensing, or holding arrangements.
Prepare substance documentation to support the legitimacy of existing structures.
Engage tax advisors, for example Shanda Consult, to develop a compliant and tax-efficient structure ahead of the 1 January 2026 effective date.

For more information contact us on www.shandaconsult.com