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Cyprus Circular 1/2026: What It Means for Low-Tax Jurisdictions
The Cyprus Tax Department has issued Circular 1/2026 , setting out the jurisdictions classified as low-tax jurisdictions for the 2026 tax year.
This Circular is not just a reference list. It directly impacts how Cyprus companies treat payments such as dividends, interest and royalties when dealing with entities in those jurisdictions.
More importantly, it forms part of a broader shift.
It continues the defensive tax measures introduced in 2025, which initially targeted EU non-cooperative jurisdictions (blacklisted jurisdictions) and have now been extended to cover low-tax jurisdictions as well.
You can read more on those 2025 measures here.
What Is a Low-Tax Jurisdiction (LTJ) and a Blacklisted Jurisdiction (BLJ)?
For clarity:
- A Low-Tax Jurisdiction (LTJ) is a jurisdiction where the corporate tax rate is less than 50% of Cyprus’ corporate tax rate of 15%.
- A Blacklisted Jurisdiction (BLJ) refers to jurisdictions included in the EU list of non-cooperative jurisdictions, found here.
The distinction is important, as Cyprus applies different tax consequences depending on which category a jurisdiction falls into.
Low-Tax Jurisdictions Under Circular 1/2026
Based on Circular 1/2026, the following jurisdictions are classified as low-tax for 2026:
- Anguilla
- Vanuatu
- Bermuda
- British Virgin Islands
- Guernsey
- Cayman Islands
- Turks and Caicos Islands
- Isle of Man
- Bahamas
- Bahrain
- Jersey
This list is reviewed annually and applies specifically for the 2026 tax year.
Tax Impact of Circular 1/2026 on Low-Tax Jurisdictions
From 1 January 2026, the following rules apply to payments made by Cyprus companies to related parties in LTJs:
Interest
- Interest paid to companies in LTJs is not tax deductible at the Cyprus company level
Royalties
- Royalty payments to companies in LTJs are also non-deductible
Dividends
- Dividends paid to companies in LTJs are subject to withholding tax under the Special Defence Contribution framework (5%), as referenced in the Circular
In practical terms, this means that structures relying on:
- IP companies
- financing companies
- holding entities
in low-tax jurisdictions will now face direct tax inefficiencies.
Defensive Measures Introduced in 2025 (Blacklisted Jurisdictions)
Before extending to LTJs, Cyprus introduced defensive measures in 2025 targeting EU blacklisted jurisdictions (BLJs).
These include:
Dividends: 17% withholding tax
Interest: 17% withholding tax
Royalties: 10% withholding tax
These measures already apply from 16 April 2025 and represent a stricter regime compared to LTJs.
Substance Requirements and Anti-Abuse Rules
Beyond the tax rates, Cyprus has significantly strengthened its substance and anti-abuse framework.
The rules allow the Tax Department to disregard structures where:
- the main purpose is to avoid tax, and
- there is no valid commercial rationale
To support this, Cyprus companies making payments must be able to demonstrate that the recipient entity meets substance criteria, including:
- Directors with real decision-making authority
- Local presence and office space
- Board meetings held in the jurisdiction
- Adequate operating expenses
- Genuine business activity (not just pass-through income)
In many cases, companies must satisfy at least 5 out of 6 substance indicators, or risk the defensive measures applying in full.
To discover more about economic substance, visit our Economic Substance Services page
Other Key Provisions to Be Aware Of
A. Minimum Ownership Threshold
The rules apply where there is a related party relationship, generally defined as:
- 50% or more ownership, voting rights or profit entitlement
B. Permanent Establishments
The rules also extend to permanent establishments in low-tax or blacklisted jurisdictions, unless:
- the head office is in a compliant jurisdiction, and
- the income is subject to sufficient taxation
C. Documentation Obligations
The Cyprus company must:
- maintain supporting documentation for at least 6 years
- demonstrate compliance if requested by the Tax Authorities
Failure to do so may result in penalties and application of defensive measures.
D. Double Tax Treaty Considerations
Cyprus may also:
- re-negotiate double tax treaties with low-tax or blacklisted jurisdictions
particularly where taxing rights are not aligned with the new framework.
Entry Into Force
- Measures relating to blacklisted jurisdictions:
Effective from 16 April 2025 - Measures relating to low-tax jurisdictions (Circular 1/2026):
Effective from 1 January 2026
What This Means in Practice
These developments signal a clear direction:
Structures involving low-tax or blacklisted jurisdictions are now:
- less tax efficient
- more complex to justify
- subject to increased scrutiny
For many businesses, this is the point where:
- restructuring becomes necessary, or
- a full repositioning of the structure is required
How KIKLON Partners Can Assist
At KIKLON Partners, we assist clients with:
- Corporate structuring and restructuring
- Cyprus company formation and tax positioning
- Redomiciliation of companies into Cyprus
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