Cyprus Defensive Tax Measures 2026: What Groups with BVI, Cayman or Other Low-Tax Entities Need to Know

Cyprus introduced a comprehensive framework of defensive tax measures through Laws 47(I)/2025 and 48(I)/2025, enacted on 16 April 2025 and published in the Official Gazette of the Republic. The measures targeting EU blacklisted jurisdictions came into force immediately upon publication. The measures targeting low-tax jurisdictions took effect on 1 January 2026.

For international groups with Cyprus companies that make payments to — or receive payments from — associated entities in certain offshore or low-tax jurisdictions, these rules have direct and immediate consequences. Dividends, interest, and royalty payments that were previously made without withholding tax may now be subject to it. Interest and royalty expenses that were previously deductible may no longer be. Cyprus companies with annual statutory audit requirements and tax return obligations must also ensure the 2026 tax computation reflects the correct treatment before filing.

This article explains the rules as they stand, identifies which jurisdictions are affected, sets out the practical consequences with examples, and describes what Cyprus companies need to do now.

The two categories of affected jurisdictions

EU blacklisted jurisdictions (BLJ): Jurisdictions included in the EU list of non-cooperative jurisdictions for tax purposes, as published in Annex I of the Official Journal of the European Union. A jurisdiction qualifies as a BLJ if it appears on that list at the time of the transaction and also appeared on the list in the previous calendar year.

Low-tax jurisdictions (LTJ): Jurisdictions with a corporate tax rate that is lower than 50% of the Cyprus corporate tax rate, as defined in Article 25 of the Income Tax Law. With the Cyprus corporate tax rate at 15% from 1 January 2026, the relevant threshold is 7.5%. Any jurisdiction with a corporate tax rate below 7.5% qualifies as a low-tax jurisdiction for these purposes.

The Cyprus Tax Department published Circular 1/2026 on 9 April 2026, identifying the official list of low-tax jurisdictions for the 2026 tax year. The list is assessed annually based on each jurisdiction’s corporate tax rate and will be updated accordingly. A jurisdiction’s status can therefore change from year to year as tax rates change.

The confirmed list of low-tax jurisdictions for 2026

The following jurisdictions are confirmed as low-tax jurisdictions for the 2026 tax year under Circular 1/2026 of the Cyprus Tax Department. Payments made to or from associated companies in these jurisdictions are subject to the measures described in this article.

Anguilla and Vanuatu are included on both the low-tax jurisdiction list and the EU blacklisted jurisdiction list simultaneously. Both sets of rules apply to payments involving entities in those jurisdictions, with the more stringent 17% dividend rate applying in each case.

An important development: on 17 February 2026, the EU Council updated the blacklist and the revised Annex I was published in the Official Journal on 6 March 2026. Turks and Caicos Islands was added to the EU blacklist at that point. However, the BLJ definition in the Cyprus law requires a jurisdiction to appear on the list at the time of the transaction and also in the previous calendar year. Since Turks and Caicos was not on the EU blacklist during 2025, the full BLJ rules — including the 17% dividend withholding — will not apply to Turks and Caicos until the 2027 tax year. For 2026, it remains subject to the LTJ rules only (5% dividend withholding, deduction denial for interest and royalties).

The EU list of non-cooperative jurisdictions is also updated twice yearly — in February and October. The February 2026 update added Turks and Caicos Islands and Vietnam to the blacklist and removed Fiji, Samoa, and Trinidad and Tobago. Cyprus companies should monitor both the LTJ list (published annually by the Cyprus Tax Department) and the EU blacklist (updated February and October) to ensure they apply the correct treatment to each jurisdiction in each tax year.

What the rules actually do: the measures by payment type

The defensive measures work differently depending on the type of payment and the category of jurisdiction involved. The table below summarises the full framework. Note that the dividend withholding rate for LTJ entities was set at 17% by N.48(I)/2025 but subsequently amended to 5% by the broader tax reform Law N.245(I)/2025, which replaced Article 3 of the SDC Law in its entirety with effect from 1 January 2026.

Withholding tax on dividends: The rate depends on the category of the recipient jurisdiction. Where a Cyprus company pays a dividend to an associated company in an EU blacklisted jurisdiction, 17% SDC withholding applies. Where the recipient is in a low-tax jurisdiction only (not simultaneously blacklisted), the rate is 5% under the consolidated SDC Law as amended by N.245(I)/2025, effective 1 January 2026. Where a jurisdiction appears on both lists — as is the case with Anguilla and Vanuatu — the blacklisted jurisdiction rate of 17% applies. This applies regardless of whether a double tax treaty exists between Cyprus and the recipient jurisdiction, though Cyprus has committed to initiating renegotiation within three years where a treaty currently prevents imposition of the withholding tax.

Withholding tax on interest to blacklisted jurisdictions: Interest paid by a Cyprus company to an associated company in an EU blacklisted jurisdiction is subject to 17% withholding tax on the gross amount. This rule was already in force before 1 January 2026.

Deduction denied for interest to low-tax jurisdictions: Interest paid or accrued by a Cyprus company to an associated company in a low-tax jurisdiction is not deductible for Cyprus corporate tax purposes from 1 January 2026. This applies whether or not the interest has actually been paid — accrued interest is equally caught. The deduction denial applies regardless of whether the arrangement is at arm’s length.

Deduction denied for royalties to low-tax jurisdictions: Intellectual property royalties, licensing fees, and similar payments made or accrued by a Cyprus company to an associated company in a low-tax jurisdiction are not deductible for Cyprus tax purposes from 1 January 2026.

Withholding tax on royalties to blacklisted jurisdictions: Royalties paid by a Cyprus company to an associated company in an EU blacklisted jurisdiction are subject to 10% withholding tax on the gross amount. Already in force.

Who is an associated company for these purposes?

The measures apply only where the payment is made between associated companies. The definition of association for these purposes is based on a 50% threshold across three possible relationships, as set out in Article 11(17)(β) of the Income Tax Law.

A company is associated with another where one holds, directly or indirectly, at least 50% of the voting rights, share capital, or entitlement to profits of the other. Association also exists where a third party holds at least 50% in both companies simultaneously. The association test looks through indirect holdings and applies collectively where a company and its associated persons together meet the 50% threshold.

The practical consequence is that the standard group structures used by international groups are almost always captured. A BVI parent that owns 100% of a Cyprus subsidiary is associated with it. A Cyprus company that owns 100% of a BVI subsidiary is associated with it. A common shareholder owning 100% of both a Cyprus company and a Cayman entity creates association between those two entities even if they do not own each other directly. Groups considering whether to establish or restructure a Cyprus entity should review the substance and governance requirements that a Cyprus-resident company must meet — see our guide to Cyprus company incorporation.

The rules also extend to payments made to permanent establishments located in low-tax or blacklisted jurisdictions, regardless of whether the company maintaining that permanent establishment is itself resident in such a jurisdiction.

Practical examples

Example 1 — Interest on a loan from a BVI parent: A Cyprus operating company borrows from its BVI parent and pays interest. BVI is on the 2026 low-tax jurisdiction list. The Cyprus company and the BVI parent are associated. From 1 January 2026, the interest expense is not deductible for Cyprus corporate tax purposes, regardless of whether the loan is at arm’s length and regardless of the interest rate applied. The interest accrual itself — even if not yet paid — is equally disallowed.

Example 2 — Dividend paid upward to a Cayman holding company: A Cyprus company declares and pays a dividend to its Cayman Islands parent, which holds 100% of the Cyprus company. The Cayman Islands is on the 2026 low-tax jurisdiction list (LTJ only, not EU blacklisted). The Cyprus company must withhold 5% SDC on the gross dividend before remitting the balance. If the dividend is EUR 100,000, the Cyprus company retains EUR 5,000 and pays EUR 95,000 to the Cayman parent. Had the Cayman Islands appeared on the EU blacklist simultaneously, the 17% rate would apply instead.

Example 3 — Royalty paid to a BVI IP holding company: A Cyprus company pays a royalty to a BVI entity that holds intellectual property used in the Cyprus company’s business. The BVI entity is owned by the same shareholders as the Cyprus company — the 50% association threshold is met through common ownership. The royalty payment is not deductible for Cyprus tax purposes from 1 January 2026, regardless of the commercial basis for the arrangement.

Example 4 — Payments to a Jersey management company: A Cyprus subsidiary pays management fees to a Jersey company within the same group. Jersey is on the 2026 low-tax jurisdiction list. Management fees constitute a payment for services and do not fall within the categories of royalties or interest — the deduction denial for LTJs applies specifically to royalties and interest, not to all payments. However, if the management fee agreement includes a royalty element or involves intellectual property, that element will be disallowed. The structure of the agreement and the nature of each payment component matters.

These examples illustrate that common group structures involving Cyprus entities and offshore holding or financing companies are directly affected. The rules operate automatically — there is no notification required from the Tax Department and no prior assessment. The Cyprus company is responsible for applying the correct treatment when preparing its tax computation and making payments.

The General Anti-Abuse Rule

The defensive measures framework includes a General Anti-Abuse Rule (GAAR) under both the Income Tax Law and the Special Defence Contribution Law. The GAAR is designed to capture arrangements where an intermediary entity — not itself in a low-tax or blacklisted jurisdiction — is interposed primarily to circumvent the application of the defensive measures.

Where an arrangement or series of arrangements has as its main purpose, or one of its main purposes, the obtaining of a tax advantage that defeats the object of the defensive measures, and the arrangement does not reflect genuine economic reality, the defensive measures will apply as if the interposed entity did not exist. The burden of proof shifts to the company making the payment to demonstrate valid commercial reasons reflecting economic reality.

The Council of Ministers has issued decrees — KDP 109/2025 and KDP 110/2025 — setting out the criteria that a recipient company must satisfy to demonstrate substance. A Cyprus company making payments to an associated entity in a non-LTJ, non-BLJ jurisdiction must nonetheless maintain supporting documentation that the recipient entity meets at least five of the six substance criteria set out in the decree, where the defensive measures could otherwise apply if the intermediary is disregarded.

The substance criteria include: a qualified director resident in the recipient’s jurisdiction with genuine decision-making authority; physical office premises in that jurisdiction; board meetings held predominantly in that jurisdiction; operating expenses proportionate to activities; and a group structure that is not designed solely to channel income through the recipient with minimal taxable profit retained.

Where a recipient entity fails to meet at least two of the six criteria, the defensive measures apply automatically unless the paying company can demonstrate valid commercial reasoning reflecting economic reality. Groups reviewing their financing structures should also consider that the Cyprus Notional Interest Deduction remains available on new equity introduced into Cyprus companies, which may offer an alternative to intercompany debt arrangements with LTJ entities.

Documentation obligations and penalties

Cyprus companies making payments to associated entities — whether in LTJ or BLJ jurisdictions or in third-country jurisdictions that might be subject to the GAAR — must maintain supporting documentation for a minimum of six years from the end of the tax year to which the transactions relate. This obligation arises regardless of whether withholding tax was applied or the deduction was denied.

The Tax Commissioner may require a company to submit a detailed statement of transactions falling within the scope of the rules, together with documentation demonstrating that the recipient entity meets the required substance criteria. This request may be made at any time within the six-year retention period.

Under Article 50H of the Assessment and Collection of Taxes Law, as amended by Law 49(I)/2025, administrative fines apply where a company fails to provide the required documentation within 60 days of a request. The fines are EUR 2,000 for submission between days 61 and 90, EUR 4,000 for submission between days 91 and 120, and EUR 10,000 for submission after day 121 or failure to submit at all.

A compliance declaration must also be made as part of the annual corporate tax return confirming that the company has complied with the requirements of the relevant decrees.

The treaty position

Where Cyprus maintains a double tax treaty with a jurisdiction that is classified as a low-tax or blacklisted jurisdiction, and that treaty does not grant Cyprus the right to impose withholding tax on the relevant payment, the domestic law takes the position that Cyprus will initiate treaty renegotiation within three years. In the interim, the treaty may override the domestic withholding tax obligation.

For jurisdictions on the 2026 LTJ list, where Cyprus has a double tax treaty in force as of 1 January 2026, Cyprus is required to notify the other jurisdiction through diplomatic channels within three years of that date to initiate renegotiation. The list confirms that the defensive measures apply to the jurisdictions listed regardless of treaty status — but the practical position for treaty jurisdictions requires case-by-case assessment of the specific treaty provisions and the taxing rights they allocate.

Most of the jurisdictions on the 2026 LTJ list — including BVI, Cayman Islands, Bermuda, and Bahamas — do not have double tax treaties with Cyprus. The withholding tax therefore applies without treaty protection.

What Cyprus companies need to do now

The rules have been in force since 1 January 2026 for low-tax jurisdictions. Any payments made after that date to associated entities in the jurisdictions listed above should already have been assessed against these rules. Where withholding tax should have been applied and was not, or where a deduction was claimed that is not available, the corporate tax return for 2026 will need to reflect the correct position.

The immediate steps for any Cyprus company with intercompany payments involving offshore entities are as follows. First, identify all associated entities in the group structure and determine whether any are resident in or incorporated in jurisdictions on the 2026 LTJ list or the EU blacklisted jurisdiction list. Second, map the nature of payments made to or received from those entities — dividends, interest, royalties, management fees, or other payments. Third, assess the applicable treatment for each payment type under the framework set out in this article. Fourth, confirm that the corporate tax computation for 2026 reflects the correct treatment — deductions denied where required, withholding tax applied where applicable. Fifth, ensure that supporting documentation for recipient entity substance is maintained and that the compliance declaration in the tax return is completed accurately.

For groups where restructuring may be appropriate — for example, moving financing arrangements out of LTJ entities, or consolidating IP holding structures in non-LTJ jurisdictions — that is a separate advisory exercise that requires legal and tax advice specific to the group’s structure and objectives. The role of the Cyprus auditor and tax advisor in this context is to ensure the correct interpretation and application of the existing rules and to identify exposure before the Tax Department does.

Frequently asked questions

Which jurisdictions are on the Cyprus low-tax jurisdiction list for 2026?

The confirmed list for 2026, published by the Cyprus Tax Department in Circular 1/2026, includes: Anguilla, Vanuatu, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Isle of Man, Turks and Caicos Islands, Bahrain, Bahamas, and Jersey. Anguilla and Vanuatu also appear on the EU blacklisted jurisdiction list, meaning both sets of rules apply to payments involving entities in those jurisdictions.

Does the deduction denial for interest apply to loans from a BVI parent company?

Yes. Where a Cyprus company pays or accrues interest on a loan from a BVI associated company, that interest is not deductible for Cyprus corporate tax purposes from 1 January 2026. The BVI is on the 2026 low-tax jurisdiction list. The disallowance applies regardless of whether the loan is at arm’s length and regardless of the interest rate. Accrued interest is caught even if not yet paid.

What is the SDC withholding rate on dividends paid to a Cayman Islands holding company?

The rate is 5%, not 17%, provided the association threshold is met. The Cayman Islands is on the 2026 LTJ list but is not an EU blacklisted jurisdiction. Under the SDC Law as amended by N.245(I)/2025 (effective 1 January 2026), dividends paid to associated companies in low-tax jurisdictions are subject to 5% SDC withholding. The 17% rate applies only where the recipient is in an EU blacklisted jurisdiction. Where a jurisdiction appears on both lists — as with Anguilla and Vanuatu — the 17% blacklisted rate takes precedence.

Do these rules apply to management fees paid to a group entity in a low-tax jurisdiction?

Management fees paid for services do not fall within the categories specifically targeted by the deduction denial for LTJs, which covers interest and royalties. However, if the management fee agreement includes components that constitute royalties or licensing payments for intellectual property, those components will be disallowed. The structure of the agreement and the characterisation of each element matters. Where an agreement bundles service fees and royalty elements together, a proper analysis of each component is required.

What is the threshold for the low-tax jurisdiction classification?

A jurisdiction is classified as a low-tax jurisdiction where its corporate tax rate is below 50% of the Cyprus corporate tax rate as defined in Article 25 of the Income Tax Law. With Cyprus at 15% from 1 January 2026, the threshold is 7.5%. Any jurisdiction with a corporate tax rate below 7.5% qualifies. The list is assessed and published annually by the Cyprus Tax Department and may change as tax rates in individual jurisdictions change.

What documentation does a Cyprus company need to maintain?

For payments to associated entities where defensive measures could apply, the Cyprus company must maintain supporting documentation for at least six years from the end of the relevant tax year. Where the payment is made to an entity not in a LTJ or BLJ but where the GAAR could apply, the company must maintain evidence that the recipient entity meets at least five of the six substance criteria set out in the Council of Ministers decrees KDP 109/2025 and KDP 110/2025. A compliance declaration must be included in the annual corporate tax return.

Do double tax treaties protect against these withholding taxes?

This depends on the specific treaty and the taxing rights it allocates. Most of the jurisdictions on the 2026 LTJ list — BVI, Cayman Islands, Bermuda, Bahamas — do not have double tax treaties with Cyprus, so no treaty protection applies. Where a treaty does exist with a listed jurisdiction and does not grant Cyprus withholding tax rights, Cyprus is required to initiate renegotiation within three years. The interim treaty position requires case-specific legal analysis.

Speak to us directly

If your group includes a Cyprus company that makes or receives payments involving BVI, Cayman Islands, Bermuda, Jersey, or any other jurisdiction on the 2026 low-tax jurisdiction list, the position for the 2026 tax year should be assessed now. The defensive measures apply automatically — there is no notification from the Tax Department before the corporate tax return is filed, and errors in the tax computation create exposure to additional assessments, interest, and penalties. At Nikita & Partners, we advise Cyprus companies on the correct application of these rules, review intercompany payment structures, and ensure that tax returns reflect the accurate position. Email us at info@nikitapartners.com.cy.

This article is intended for general informational purposes only and does not constitute tax, legal, or professional advice. The rules summarised here are based on Cyprus legislation and official guidance as at April 2026.