Cyprus has introduced defensive tax measures for certain payments to associated entities in EU blacklisted and low-tax jurisdictions, with the low-tax jurisdiction rules applying from 1 January 2026. On 9 April 2026, the Cyprus Tax Department published the 2026 low-tax jurisdiction list which may have an impact on client structures.
Background
As part of Cyprus' commitments under the EU Recovery and Resilience Plan, Cyprus introduced defensive tax measures targeting transactions involving EU blacklisted jurisdictions (BLJs) and low-tax jurisdictions (LTJs). These measures are designed to discourage the diversion of profits to jurisdictions considered non-cooperative or subject to very low levels of taxation.
The rules apply to certain payments of dividends, interest and royalties made by Cyprus tax resident companies to associated entities in BLJs or LTJs. Depending on the nature of the payment and the jurisdiction of the recipient, the measures may impose withholding tax or deny a Cyprus tax deduction for the relevant expense. In general, the provisions apply where the recipient company has a direct or indirect association exceeding 50% with the Cyprus paying company.
The regime also includes anti-abuse provisions aimed at countering artificial arrangements and conduit structures established principally to obtain a tax advantage. Taxpayers may be required to demonstrate sufficient economic substance in the recipient jurisdiction, while supporting documentation must be retained for at least six years. Administrative penalties may apply where the required documentation cannot be produced.
The measures relating to EU blacklisted jurisdictions became effective on 16 April 2025, whilst the measures applicable to low-tax jurisdictions take effect from 1 January 2026.
Summary of Defensive Measures
| Payment Type | EU Blacklisted Jurisdiction (BLJ) | Low-Tax Jurisdiction (LTJ) |
|---|---|---|
| Dividends | 17% withholding tax | 5% withholding tax |
| Interest | 17% withholding tax | Non-deductible expense in Cyprus |
| Royalties | 10% withholding tax | Non-deductible expense in Cyprus (unless 10% WHT applies under existing provisions) |
Cyprus Tax Department Publishes 2026 LTJ List
On 9 April 2026, the Cyprus Tax Department issued a Circular specifying the jurisdictions regarded as Low-Tax Jurisdictions (LTJs) for the purposes of the defensive tax measures applicable from 1 January 2026.
The jurisdictions designated as LTJs for 2026 are:
- Anguilla
- Bahamas
- Bahrain
- Bermuda
- British Virgin Islands
- Cayman Islands
- Guernsey*
- Isle of Man
- Jersey*
- Turks and Caicos Islands
- Vanuatu
* Cyprus concluded Double Taxation Conventions with both Jersey and Guernsey in 2015. These treaties generally eliminate Cyprus withholding tax on dividend, interest and royalty payments. Taxpayers with structures involving either jurisdiction should seek advice regarding the interaction between the treaty provisions and the defensive tax measures.
ICONIX Comment
Since the Organisation for Economic Cooperation and Development’s BEPS initiative and the introduction of anti-avoidance measures worldwide, the use of holding, financing and intellectual property structures in low-tax jurisdictions has become increasingly challenging. Tax authorities now place greater emphasis on economic substance, transparency and the exchange of information to counter profit shifting and harmful tax practices.
Cyprus has already implemented a broad range of OECD and EU anti-avoidance measures, including the Anti-Tax Avoidance Directive (ATAD). The defensive measures applicable to low-tax and blacklisted jurisdictions represent a further step in strengthening Cyprus' international tax framework and supporting its position as a reputable financial centre.
Groups with Cyprus entities should review existing structures involving jurisdictions included on the 2026 low-tax jurisdiction list to identify any exposure to withholding tax or restrictions on tax deductibility. Particular attention should be given to financing, holding and intellectual property arrangements, as well as the availability of treaty benefits and the economic substance of recipient entities.
Taxpayers should also ensure that appropriate supporting documentation is maintained to demonstrate compliance with the new rules and to evidence the commercial rationale and substance of the relevant arrangements where required.