Executive summary

On 13 March 2026, through the publication in the Official Gazette, the Council of Ministers issued three new decrees (New Decrees) regarding the provisions for applying the anti-abuse rules for both low-tax jurisdictions and jurisdictions included in the European Union (EU) list of noncooperative jurisdictions (Annex I), which are often referred to as "blacklisted" jurisdictions (BLJs). The New Decrees relate to dividend, interest and royalty payments to associated companies and supersede two previously issued decrees (Old Decrees) that stipulated the provisions for applying the anti-abuse rules in relation to the defensive measures for BLJs.

In April 2025, Cyprus introduced defensive tax measures targeting EU BLJs and low-tax jurisdictions. For background, see EY Global Tax Alert, Cyprus introduces defensive tax measures targeting low-tax and 'blacklisted' jurisdictions, dated 15 April 2025.

BLJs are jurisdictions that are included in Annex I at the time of the transaction and in the previous calendar year. The list of low-tax jurisdictions has not yet been issued by the Cypriot tax authorities. This is expected to happen in the coming weeks.

Detailed discussion

Changes in the law since the enactment of the measures in April 2025

As described in the EY Global Tax Alert, Cyprus enacts major tax reform legislation, dated 8 January 2026, the corporate income tax (CIT) rate has increased from 12.50% to 15% as of 2026. This would mean that a low-tax jurisdiction is one that has a CIT rate lower than 7.5% (50% of Cyprus's CIT rate). In addition, the dividend withholding tax rate on dividend payments made to associated companies in low-tax jurisdictions is 5% (previously 17%).

Anti-abuse provisions included in the law

A specific anti-avoidance rule (SAAR) mechanism is included in the law to counteract arrangements lacking commercial substance that are primarily designed to circumvent the application of the defensive measures. Essentially, the SAAR is aiming to combat arrangements for interposed entities that are not in a BLJ or low-tax jurisdiction.

The law provides that if the main purpose, or one of the main purposes, of an arrangement or series of arrangements that has been put in place is to obtain a tax advantage that defeats the object or purpose of the defensive measures, and considering all relevant facts and circumstances, the arrangement or series of arrangements has not been put into place for valid commercial reasons that reflect economic reality, the defensive measure shall apply ignoring the arrangement or series of arrangements.

For the application of the SAAR, the law provides that the Council of Ministers will issue a decree. To the extent that the relevant conditions described in the New Decrees are not met, the defensive measure shall apply unless the company making the payment demonstrates that (1) the arrangement or series of arrangements was put in place for valid commercial reasons that reflect economic reality or (2) obtaining a tax advantage was not the only purpose of the arrangement or series of arrangements.

Decrees issued for the application of the SAAR provisions

On 13 March 2026, the Council of Ministers issued the New Decrees for applying the anti-abuse provisions in relation to defensive measures for payments to BLJs or low-tax jurisdictions. The New Decrees supersede the Old Decrees and are effective as of 1 January 2026.

The New Decrees provide that every company making a payment of dividends, interest or royalties to an associated company (as defined in the law) for which no tax is withheld and a tax deduction has been claimed (the latter is relevant only for interest and royalties), as required under the relevant provisions of the law for BLJs and low-tax jurisdictions, must maintain supporting documentation about the company receiving the income for the statute of limitations period. Effectively, the documentation requirements apply to payments made to companies that are not in EU BLJs and low-tax jurisdictions unless an exception applies (see below).

Exceptions from the documentation requirements

The documentation requirements do not apply:

1. If the dividend/interest is paid in respect of securities listed on a regulated market of a recognized stock exchange, and it is reasonable to consider that the company paying the dividend/interest is not aware that the dividend/interest is paid, directly or indirectly, to an associated company (as defined) in a blacklisted or low-tax jurisdiction
2. If the payment is made to a nonresident company that maintains a permanent establishment in a noncooperative or low-tax jurisdiction and is resident in a jurisdiction that is neither a low-tax jurisdiction nor a noncooperative jurisdiction, and certain conditions are met (different rules may apply depending on the type of payment)
3. If the payment is made to a nonresident company that is resident in neither a low-tax jurisdiction nor a noncooperative jurisdiction for which the paying company can demonstrate that (1) the arrangement (or series of arrangements) was put in place for valid commercial reasons reflecting economic reality or (2) obtaining a tax advantage was not the only purpose of the arrangement or series of arrangements

Moreover, the documentation requirements do not apply if the recipient company is:

1. A tax resident of Cyprus
2. A tax resident of another EU member state or in the European Economic Area
3. Part of a multinational group and subject to a minimum tax of 15% based on legislation adopting the EU Directive 2022/2523 on global minimum tax or the Organisation for Economic Co-operation and Development (OECD) Global Anti-Base Erosion (GloBE) Model Rules
4. A member of a consolidated group for accounting purposes that does not have a presence in a BLJ or in a low-tax jurisdiction, either through a company or through a permanent establishment

Neither the decrees nor the law makes any reference to situations in which a payment is made to a company that is tax resident in a jurisdiction with which Cyprus has concluded a tax treaty for the avoidance of double taxation.

Documentation requirements

If none of the above exceptions is met, the documentation requirements should apply to satisfy the anti-abuse provisions on payments to associated companies. As per the New Decrees, if the recipient company fails to satisfy two or more of the below-listed conditions (i.e., does not meet at least four of the six conditions), the arrangement (or series of arrangements) shall be disregarded, and the defensive measure shall apply (withholding tax or denial of interest or royalty expense, depending on the type of payment and status of the recipient).

The company making payments to an associated company without applying the defensive measure must evaluate and retain supporting documentation for the statute of limitation period to support the following matters in relation to the company receiving the income:

1. Effective decision-making: At least one board member is qualified and authorized to make decisions regarding the company's activities, assets or rights that generate the company's income and is actively and independently exercising his duties.
2. Local presence of decision-makers: At least one board member resides in the jurisdiction where the company is tax resident or within a distance that allows the individual to commute daily.
3. Office space: The recipient company has office space at its disposal in the jurisdiction of its tax residence that allows its directors and employees to exercise their duties.
4. Board meetings: Most of the board meetings take place in the jurisdiction of tax residence of the recipient company.
5. Operational expenses: The operational expenses of the recipient company (including the remuneration of directors and employees), that are paid to persons in the jurisdiction where the recipient company is tax resident for the tax year to which the transactions relate, are proportional to its activities.
6. Beneficial ownership: The group of companies of which the recipient company is a member is not structured such that the company's only activity is to collect the income from the Cypriot company and then transfer that entire amount (or almost all the amount) to another associated company very soon after such income is received so that it realizes an insignificant amount of taxable income while effectuating the transfer of funds to the beneficial owner of the income.

Administrative enforcement and penalties

Companies making payments to associated companies that fall within the object of the New Decrees (even if an exception applies) are required to make the necessary disclosure in their annual income tax returns. Cypriot tax authorities have not yet released the 2025 CIT return template.

Moreover, as per the New Decrees, the tax authorities have the right to request that taxpayers submit evidence and supporting documentation for confirming compliance with the documentation requirements as described in the relevant decrees.

The law includes administrative penalties for failure to provide the tax authorities with the requested information within 60 days, as follows:

• €2,000 if documents are submitted between days 61 and 90 from the request
• €4,000 if submitted between days 91 and 120
• €10,000 if submitted after day 121 or not submitted at all

Multinational entities should review their payment structures and ensure robust documentation and disclosure practices to avoid penalties and comply with the expanded anti-abuse provisions.