Tax Measures for Low-Tax and Blacklisted Jurisdictions – Exemption Conditions

Further to our previous newsfeed on this, on 16 April 2025 the tax measures were published in the Official Gazette of the Republic of Cyprus. On 17 April 2025, the Council of Ministers issued two decrees in relation to the application of anti-abuse rules concerning the tax measures for blacklisted jurisdictions. For low-tax jurisdictions the relevant rules will be defined later on in the year, since they only come in to effect on 1 January 2026.

GAAR

As mentioned in the previous newsfeed, the purpose of the GAAR is to tackle arrangements lacking commercial substance the main purpose of which is to circumvent the application of the tax measures. In particular, the legislative provisions introduced provide that the tax measures will apply in case certain qualifying criteria are not met, and:

1. the main purpose, or one of the main purposes, of an arrangement or series of arrangements is to obtain a tax advantage that defeats the object or purpose of the tax measures; and
2. 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 purpose of the decrees issued, as covered in this newsfeed, is to define the qualifying criteria for what concerns blacklisted jurisdictions.

Decrees

The decrees provide that every company making a payment of dividends, interest or royalties to an associated company for which no tax is withheld, based on the relevant provisions for blacklisted jurisdictions, must have supporting documentation about the company receiving the income. Such documentation must be kept for six years from the end of the year in which the payments take place. The Cyprus Tax Department retains the discretion to request a confirmation of compliance with the retention and record-keeping requirements.

The documentation requirements do not apply if the recipient company is:

1. a tax resident of Cyprus; or
2. a tax resident in another EU Member State or in the European Economic Area; or
3. part of a multinational group and subject to a minimum tax of 15% based on legislation adopting the EU Directive on Global Minimum Tax for Multinational and Large Domestic Groups or the OECD GloBE Rules; or
4. A member of a consolidated group for accounting purposes that does not have a presence in a blacklisted jurisdiction, either through a company or through a permanent establishment.

The supporting documentation needs to provide evidence that the recipient company satisfies at least five out of six criteria as follows:

1. At least one board member is qualified and authorized to make decisions regarding the company’s activities, assets or rights that generate the income of the company and is actively and independently exercising his/her duties.
2. At least one board member with decision-making powers resides in the jurisdiction where the recipient company is tax resident or within a distance that allows him/her to commute daily.
3. 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. The majority of the board meetings of the recipient company take place in the jurisdiction in which it is tax-resident.
5. The recipient company’s operational expenses (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. The group of companies which the recipient company is part of, is not structured in such a way that the company’s only activity is to collect the income from the Cyprus company and then transfer the entire amount (or almost all of it) to another associated company very soon after the income is received, so that it realizes an insignificant amount of taxable profit, while achieving the transfer of funds to the beneficial owner of the income.

If the recipient company fails to satisfy at least five out of the above six criteria, the arrangement (or series of arrangements) shall be disregarded. In such a case the tax measures introduced will apply, unless evidence is provided that either or both of the exemption conditions mentioned above (valid commercial reasons reflecting economic reality and reasons other or additional to obtaining a tax advantage) are in place.

Compliance and Penalties

The Assessment and Collection of Taxes Law was amended to give the Cyprus Tax Department the right to request the submission of information confirming compliance with the documentation requirements covered by the decrees.

The law includes administrative penalties for failure to provide to the Cyprus Tax Department the information requested within 60 days. The penalties depend on when the requested information is submitted and are as follows:

• €2,000 in case submitted between days 61-90 from the request
• €4,000 in case submitted between days 91-120
• €10,000 in case submitted after day 121 from the request or not submitted at all