This is an overview of the defensive tax measures in Cyprus Tax Department Circular 1/2026 and how they apply to corporate group structures for the 2026 tax year.
The Department issued the circular on 9 April 2026. It names the jurisdictions treated as Low-Tax Jurisdictions (LTJs) for 2026, and the purpose of the measures is straightforward: discourage profit shifting into low-tax jurisdictions and protect the Cyprus tax base from structures with no real substance behind them.
If you run an international business or holding company through Cyprus, this is worth checking now. Some cross-border payments may now be caught by the confirmed withholding tax and expense deduction rules.
The Low-Tax Threshold Criterion
Under Cyprus tax legislation, a jurisdiction can be treated as a Low-Tax Jurisdiction (LTJ) where its corporate income tax rate is lower than 50% of the Cyprus corporate income tax rate for the relevant year. The Cyprus Tax Department determines and publishes the list each year.
The numbers for 2026: after the 2026 reform set the Cyprus corporate income tax rate at 15%, jurisdictions with a corporate income tax rate below 7.5% can fall within the Low-Tax Jurisdiction framework, subject to the relevant legislation and the Department’s annual determination.
The Eleven Listed Jurisdictions
Circular 1/2026 names eleven jurisdictions caught by the defensive measures for 2026:
- Anguilla (LTJ and EU blacklisted)
- Bahamas (LTJ only)
- Bahrain (LTJ only)
- Bermuda (LTJ only)
- British Virgin Islands (BVI) (LTJ only)
- Cayman Islands (LTJ only)
- Guernsey (LTJ only)
- Isle of Man (LTJ only)
- Jersey (LTJ only)
- Turks and Caicos Islands (LTJ only)
- Vanuatu (LTJ and EU blacklisted)
The Department reviews this list every year and it can change. Check the list that applies to the relevant tax period before you set up or keep a cross-border structure.
The Twin Pillars of Defensive Taxation
When a Cyprus company deals with a company resident or registered in any of the eleven listed jurisdictions, two strict rules apply.
Dividend Withholding Tax (5%)
Cyprus imposes a 5% withholding tax (WHT) on dividends paid by a Cyprus tax resident company to an associated company that is resident, organised or established in a listed Low-Tax Jurisdiction. Two companies are generally associated where one holds, directly or indirectly, at least 50% of the share capital, voting rights or rights to profits.
Example: a Cyprus holding company pays dividends to its parent in the Cayman Islands, which owns 60% of it. The Cyprus company has to withhold 5% on that distribution under Circular 1/2026.
Expense Non-Deductibility
Interest and royalties paid or accrued by a Cyprus tax resident company to an associated company resident, organised or established in a listed Low-Tax Jurisdiction are generally not deductible for Cyprus corporate income tax. This sits outside transfer pricing; it is a standalone defensive rule aimed at profit shifting.
Example: a Cyprus software company pays licensing fees or royalties to its IP holding company in the British Virgin Islands (BVI). Those payments are generally not deductible for Cyprus corporate income tax, which pushes up the Cyprus company’s tax bill.
Interaction with the EU Blacklist
Do not confuse the Low-Tax Jurisdiction list with the EU blacklist of non-cooperative jurisdictions. Where a jurisdiction sits on both, as Anguilla and Vanuatu do, the EU blacklist measures generally apply instead of the Low-Tax Jurisdiction ones.
In practice that can mean a 17% withholding tax on certain dividend and interest payments, and 10% on royalties, under the EU blacklist framework. The standard 5% LTJ rate does not apply in those cases.
Treaty Considerations
There is also the question of tax treaties. The defensive measures apply to the jurisdictions listed in Circular 1/2026, but any applicable Double Tax Treaty (DTT) can change the picture. Some listed jurisdictions, including Bahrain, Guernsey and Jersey, have treaty relationships with Cyprus that may need separate analysis depending on the payment and the specific facts. Get advice before setting up any structure that involves a listed jurisdiction.
How ASC Law Can Assist
These measures make it worth reviewing your international structures, financing arrangements, IP ownership and dividend policy. At ASC Law, we work with international groups, family offices, holding companies, fintech businesses, investment structures and high-net-worth individuals on:
- Cyprus tax and legal reviews of existing corporate structures;
- exposure to the Low-Tax Jurisdiction and EU Blacklist measures;
- planning for cross-border dividends, interest and royalties;
- Cyprus holding company structuring;
- intellectual property (IP) and licensing structures;
- corporate substance and tax residency reviews;
- international tax risk assessments;
- and ongoing legal and tax compliance support.
To talk through how the new measures affect your business, contact our team for a confidential consultation.
Frequently Asked Questions (FAQ)
Does Cyprus impose withholding tax on dividends paid to all foreign shareholders?
No. As a rule, Cyprus does not withhold tax on dividends paid to non-resident shareholders. The exception is where the recipient is an associated company resident, organised or established in a Low-Tax Jurisdiction or an EU Blacklisted Jurisdiction.
What is considered an associated company?
Companies are generally associated where there is direct or indirect participation of at least 50% in share capital, voting rights, or rights to profits.
Do the rules apply to individuals?
The defensive measures mainly target payments between associated companies. How they apply in a given case should be assessed on the facts.
Are all jurisdictions with tax rates below 7.5% automatically considered Low-Tax Jurisdictions?
No. The Cyprus Tax Department determines and publishes the applicable list each year.
What is the difference between a Low-Tax Jurisdiction and an EU Blacklisted Jurisdiction?
A Low-Tax Jurisdiction is identified by the Cyprus Tax Department under Cyprus tax legislation. An EU Blacklisted Jurisdiction sits on the European Union list of non-cooperative jurisdictions for tax purposes. The defensive measures that apply can differ.
How often is the Low-Tax Jurisdiction list updated?
Every year. The Cyprus Tax Department reviews and publishes it annually.
Does the 5% withholding tax apply where the dividend recipient is an individual resident in a Low-Tax Jurisdiction?
No. The 5% withholding tax applies to dividends paid to associated companies resident, organised or established in a listed Low-Tax Jurisdiction. Where the recipient is an individual rather than a company, the LTJ withholding provisions generally do not apply, though the wider facts of the structure should still be checked for any other Cyprus tax rules that might be relevant.
