Cyprus and the Tax Reform: What to Expect?

Why Is Cyprus Undertaking a Tax Reform?

The main reason for the reform is Cyprus’s obligations under the EU Recovery and Resilience Plan, as well as the need to follow global OECD initiatives, especially BEPS 2.0. In this way, the government aims to combine Cyprus’s attractiveness for business with modern requirements to prevent tax avoidance and harmful tax practices.

The goals of the reform are multifaceted:

• to increase the competitiveness of the jurisdiction in the global market;
• to preserve its reputation as a reliable financial center;
• to adapt the system to the global minimum tax;
• to create additional incentives for innovation, “green” investments, and long-term development.

What Has Already Changed for Businesses in Cyprus?

In April 2025, the Cypriot Parliament approved a number of amendments concerning the control of payments to low-tax jurisdictions and countries included in the EU “blacklist,” which is worth discussing in more detail.

Payments to “High-Risk” Jurisdictions

The Cypriot Parliament has introduced a withholding tax on the payment of royalties, interest, and dividends to companies that are tax residents of countries included in the EU’s LTJ and BLJ lists, or that are registered in such jurisdictions and do not have tax residency in any other country.

Starting from 2026, Cyprus classifies jurisdictions into two groups:

1. Low-Tax Jurisdictions (LTJ): countries where the corporate income tax rate is below 6.25% (which is 50% of the Cypriot rate).
2. EU Blacklist (BLJ): countries included in the official list of non-cooperative jurisdictions published by the Council of the EU twice a year. The most recent update includes American Samoa, Anguilla, Fiji, Guam, Palau, Panama, russia, Samoa, and others.

Additionally, interest and royalty payments made to companies located in low-tax jurisdictions may no longer be treated as deductible expenses for the purpose of reducing corporate income tax. Cyprus is required to review its tax treaties with such countries within three years from the date a country is placed on the EU “blacklist” or designated as a low-tax jurisdiction.

Where payments are made to permanent establishments situated in these jurisdictions, a withholding tax on non-resident income will apply, even if the head office of the company is not classified as a “low-tax” entity.

How It Worked Before the Tax Reform in Cyprus and the Changes Introduced?

Before the Reform: Interest and royalty payments could be treated as deductible expenses, thereby avoiding additional taxation in Cyprus, provided that a double tax treaty existed between the countries.

After the Reform: Expenses for interest and royalties paid to related companies located in LTJ and BLJ jurisdictions are no longer tax-deductible.

For payments to BLJ jurisdictions, withholding tax is applied automatically as follows:

• Interest: 17% WHT
• Royalties: 10% WHT

Changes in Dividend Taxation in Cyprus:

Incoming Dividends: Before and After the Reform
Dividends received by Cypriot tax residents from any foreign company are exempt from income tax and the 17% defense contribution (SCD), provided that the parent company holds at least 1% of the share capital of the subsidiary and none of the following conditions apply.

Companies are required to pay the defense contribution if the following conditions are met simultaneously:

• More than 50% of the payer company’s activities consist, directly or indirectly, of investment activities;
• The tax paid by the foreign company is lower than the tax applicable in Cyprus (6.25% or less).

Outgoing Dividends: Before the Reform

Dividends paid by Cypriot companies to non-residents were generally exempt from withholding tax (0% WHT).

Outgoing Dividends: After the Reform

The reform introduces a 17% withholding tax on outgoing dividends paid to related companies in LTJ and BLJ jurisdictions, changing the previous policy.

Effective Dates

• From 16 April 2025 – rules concerning countries on the EU “blacklist.”
• From 1 January 2026 – provisions relating to “low-tax” jurisdictions.

Liability for Violation of New Payment Rules

The reform introduces additional responsibilities for taxpayers. If an official request is received from the tax authorities to provide confirmation of dividend, interest, or royalty payments, there is an obligation to submit the required documents within the prescribed deadline.

If the submission is delayed by more than 60 days, financial penalties will apply. The amount of these penalties ranges from €2,000 to €10,000, depending on the length of the delay. In this way, the new rules are designed to encourage timely and complete disclosure of information, enhancing the transparency of financial operations.

Strengthening of GAAR Regarding Payments

The application of the General Anti-Avoidance Rule (GAAR) is now extended to cases where payments are made indirectly through intermediary structures. If the transaction’s genuine commercial purpose cannot be demonstrated, it will be treated as falling under special tax rules.

The Cyprus Tax Department is expected to provide additional guidance soon on the criteria used and how to document the commercial purpose of such transactions.

What Tax Changes Are Expected in Cyprus?

Increase in Corporate Tax

The key development is the plan to raise the corporate income tax rate from 12.5% to 15%. This step represents a logical move toward aligning with the OECD’s global minimum tax.

In practice, the 15% rate is already applied to large groups with worldwide revenue exceeding €750 million. The plan now is to extend this rate to all companies without exception. For now, the 12.5% rate continues to apply, with a final decision expected in the near future.

At the same time, even with the increased rate, Cyprus remains an attractive jurisdiction due to:

• the absence of tax on dividends paid to non-residents;
• a zero rate on capital gains from transactions in securities;
• the availability of many tax incentives;
• incoming dividends from non-residents remaining tax-exempt, provided tax is paid in the country of registration;
• tax benefits for IT businesses under the special IP Box regime;
• 0% tax on income from the sale of subsidiaries.

Loss Carryforward

It is planned to extend the period for carrying forward tax losses from 5 to 10 years. This will allow companies to plan their activities more flexibly, although certain restrictions may apply after the fifth year.

Individual Tax Residency

The so-called “60-day rule” is being expanded. If a person has the center of their business interests in Cyprus, they may be recognized as a tax resident even without the mandatory minimum period of physical presence on the island.

Personal Income Tax

The tax-free minimum is increasing from €19,500 to €20,500.

An updated rate scale is being introduced:

• Up to €20,500 – 0%
• €20,501 – €30,000 – 20%
• €30,001 – €40,000 – 25%
• €40,001 – €80,000 – 30%
• Over €80,000 – 35%.

Special Defence Contribution (SDC)

• The rate is reduced from 17% to 5% for domiciled residents.
• Cancellation of SDC for rent – such income will be subject only to corporate income tax.
• The “deemed dividend distribution” rule is removed: companies are no longer required to treat undistributed profits as dividends for SDC purposes. Tax will apply only to dividends actually paid, which will significantly simplify the operation of holding structures.

Innovation and “Green” Incentives

Expanded deductions are planned for investments in research, development, and ESG projects. This is intended to promote the growth of fintech, green energy, and other modern industries.

Stamp Duty

Changes to the list of transactions subject to stamp duty are being considered. The duty will be applied only to real estate transactions, as well as to banking and insurance agreements. For other contracts, stamp duty will be abolished, reducing costs and simplifying documentation.

At present, the exact timeline for implementing these changes remains uncertain. While the government has outlined the direction of the reform, specific amendments and their effective dates have not yet been established, so it is important to follow further official guidance closely.

Recommendations for Businesses

1. Review Corporate Structures in Light of the New Rules

Companies should conduct an audit of all payment chains (dividends, royalties, interest) to determine whether they involve jurisdictions that are already on, or could potentially be added to, the EU “blacklist” or classified as “low-tax” jurisdictions. If such payments exist, alternative structuring options should be considered in advance to avoid unforeseen tax consequences.

1. Prepare for the Increase in Corporate Tax Rate

Although the 12.5% rate currently remains in place, businesses should model their financial results assuming a potential 15% rate. This is particularly important for companies with high margins or large profits. It is also advisable to evaluate the effectiveness of available tax incentives (such as for R&D or “green” investments), which can help reduce the actual tax burden.

1. Strengthen Tax Compliance and Internal Controls

The new financial penalties and expanded GAAR rules mean that all transactions must be properly documented. Businesses should implement internal policies for collecting and retaining evidence of the commercial purpose of transactions, so that a complete set of supporting documents is readily available in case of a request from the tax authorities.

1. Optimize the Use of Retained Earnings

The removal of the “deemed dividend distribution” rule allows for more flexible management of profits. Companies can retain earnings for reinvestment or accumulate them for future projects without the risk of additional taxation. It is advisable to consider developing new dividend policy strategies.

1. Consider the Changes for Individuals

It is important to carefully assess the upcoming changes in personal income taxation, particularly the new rules on tax residency. It may be advisable to formally establish the center of economic interests in Cyprus in order to take advantage of the new tax opportunities.

1. Monitoring and Professional Advice

The changes introduced by the tax reform are ongoing, and the effective dates for future phases are yet to be announced. Businesses need to continuously monitor official information and seek professional advice in a timely manner. This will help ensure compliance with the law and avoid the risks of unexpected additional assessments and penalties.

In this way, the reform is part of a broader process of transformation in the international tax environment. It demonstrates that the state can no longer operate solely as a “tax haven” with low rates, but aims to integrate into new global standards of transparency.

In the global context, Cyprus aims to remain a competitive jurisdiction while complying with international transparency standards. The company in Cyprus  remains attractive for investors, but it now requires more careful planning and professional legal support.

If you are planning to optimize your corporate structure in line with the new requirements, contact our specialists — we can help develop an effective solution tailored specifically to your business.