The Department issued Circular 1/2026 on 9 April 2026. It names the jurisdictions treated as Low-Tax Jurisdictions (LTJs) for 2026. The purpose 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 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 where its corporate income tax rate is lower than 50% of the Cyprus corporate income tax rate for the relevant year. With the Cyprus corporate income tax rate at 15% for 2026, jurisdictions with a corporate income tax rate below 7.5% 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. Always check the list applicable to the relevant tax period before establishing or maintaining 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 on dividends paid by a Cyprus tax resident company to an associated company 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 must withhold 5% on that distribution.
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. Those payments are generally not deductible for Cyprus corporate income tax, which increases the Cyprus company's tax liability.
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. The two regimes have different triggers and different consequences. Review both lists when assessing a structure involving a non-EU jurisdiction.
Practical Implications
Groups with Cyprus entities that have payment flows to or from any of the eleven listed jurisdictions should review those flows now. The key questions are: Is the counterparty resident or established in a listed jurisdiction? Is the payment a dividend, interest, or royalty? Are the entities associated at the 50% threshold? If the answers are yes, the withholding tax and/or non-deductibility rules are likely to apply. Restructuring options exist but require careful analysis of the substance, commercial rationale, and treaty position.
How ASC Can Help
ASC advises on the impact of Circular 1/2026 on existing and proposed structures, the restructuring options available to groups caught by the defensive measures, and the interaction between the LTJ rules, EU blacklist measures, and Cyprus treaty network. Contact us to discuss your specific situation.