Cyprus Tax Changes: An Interview with Marios Palesis


18 MARCH 2026

Victor Kalgin: Let’s move on to the first topic: withholding taxation and the general changes relating to payments to so-called blacklisted, or non-cooperative, jurisdictions, as well as low-tax jurisdictions. As a brief introduction: since 2023, Cyprus introduced a withholding tax on royalties, interest, and dividends paid to related parties in non-cooperative jurisdictions. This is a significant change, because historically Cyprus did not impose – or rarely imposed – withholding tax on outbound payments. Since 2023, non-cooperative jurisdictions have become subject to the new withholding tax rules, at rates of 17% for interest and dividends and 10% for royalties. The list of non-cooperative jurisdictions is maintained and updated by the European Union and is published a couple of times a year. There was also a recent change just a few weeks ago. Similar changes – or at least changes affecting similar structures – were introduced starting this year, 2026, applying to low-tax jurisdictions. Specifically, again royalties, interest, and dividends are targeted: dividends are subject to a lower withholding tax rate of 5%, while deductions for royalties and interest are denied if those payments are made to companies located in so-called low-tax jurisdictions. Those are the changes. Let’s now discuss a few practical questions we hear from clients. The first question is whether withholding taxes apply based on accrual or actual payment of income, because accrual and actual payment may be separated by a significant period of time. What is your view on this?
Marios Palesis: For dividends, the legislation states that the withholding tax applies when there is a distribution, that is, when a payment is made. So once you make a dividend distribution, you are obliged to withhold the relevant tax. When it comes to interest, the legislation states that withholding tax applies when the interest accrues or is paid. So in those cases, companies will need to withhold tax as the interest accrues or is being paid.
Victor Kalgin: So for royalties and interest it is an accrual basis, which means that as long as they are recognised as an expense, there is some time for the taxpayer to declare and pay the withholding tax. For dividends, I think there is still a distinction between when they are declared and when they are actually paid – dividends can be declared in one year and not paid until a later date. To what extent is the law clear on whether it is the declaration of dividends or the actual payment that triggers the obligation?
Marios Palesis: The legislation says “when the company receives dividends”, which means when there is a distribution. So once there is a distribution, you are obliged to withhold the tax.
Victor Kalgin: Understood. Let’s hope for the most optimistic interpretation – that actual payment is the event which triggers the withholding tax obligation for dividends. Now, on blacklisted versus low-tax jurisdictions: as I understand it, there is no specific list of low-tax jurisdictions, only a definition, which we will discuss separately, whereas there is a specific list of non-cooperative jurisdictions published and updated by the European Union. When must a country appear on that list for it to be considered blacklisted for Cyprus withholding tax purposes?
Let me give a concrete example. Russia was added to the EU list of non-cooperative jurisdictions in 2023. The British Virgin Islands were also added in 2023 but then removed in October of the same year. So during one year a jurisdiction was blacklisted and then no longer blacklisted. Suppose interest accrued to a BVI company during 2023 – a period when the BVI was on the blacklist for only part of the year, roughly February to October or November. How does the law address situations where a country moves in and out of the list, and when can we be certain that a specific country is considered blacklisted for withholding tax purposes?
Marios Palesis: The straightforward part is that a jurisdiction is considered blacklisted when the relevant list of non-cooperative jurisdictions is published by the European Union, which happens twice a year. However, the legislation does not provide clear guidance beyond that. Interpreting the law as it currently stands, for any period during which the company was on the blacklist, the relevant withholding taxes should be paid. For dividends, it does not matter when the profits were generated – if the dividend distribution is made during a period when the recipient jurisdiction is on the blacklist, the withholding tax must be withheld.
Victor Kalgin: I believe the definition of a non-cooperative jurisdiction was also amended in 2025, so that a jurisdiction is considered non-cooperative for Cyprus tax purposes if it was included on the EU blacklist in the previous year and is still on the list at the time income is paid or accrued. Is that correct?
Marios Palesis: Yes, that is correct. A blacklisted jurisdiction is one included in the latest publication of the EU list and which also remained on the list throughout the previous calendar year.
Victor Kalgin: So with Russia, for example: Russia was added in 2023, but was not on the list for the whole of 2022, which means 2023 itself likely does not trigger withholding tax consequences. It is from 2024 onwards that there are grounds to apply withholding tax on interest, dividends, and so on. Correct?
Marios Palesis: Yes, that appears to be correct.
Victor Kalgin: Good. One more question on dividends: what if profits were accumulated before the country appeared on the blacklist but are distributed later? For example, profits accumulated before 2022 but paid out this year – how are they treated for tax purposes?
Marios Palesis: If profits are distributed in 2026 but were generated in 2022 or 2021, there is still withholding tax, because what matters is the year of distribution.
Victor Kalgin: That is a predictable answer, and there is little hope of avoiding withholding tax by arguing that current dividends relate to old profits. Fair enough. The next question relates to anti-avoidance and beneficial ownership concepts. In Russia and many other jurisdictions – and indeed within the EU and CIS countries – beneficial ownership practice and case law is developing, and we see more and more cases where tax authorities challenge treaty benefits, withholding tax exemptions, or reduced rates, based on the beneficial ownership concept, where a structure with an intermediate entity is challenged on the basis that income ultimately flows to an offshore jurisdiction. The same type of claim could be raised in Cyprus wherever an entity is interposed between a blacklisted or low-tax jurisdiction to avoid withholding tax or other unfavourable consequences. What do you think the Cyprus tax authorities may say? Are they going to apply beneficial ownership or other anti-avoidance concepts to back-to-back structures or similar arrangements?
Marios Palesis: Definitely the Cyprus tax authorities are prepared for such structures. The legislature provides tools under the general anti-abuse rules: if an arrangement or company is set up in order to avoid or postpone payment of withholding tax, it can be looked through. There was also a decree issued by the Council of Ministers in 2025 – I believe the decree numbers are 109 and 100 of 2025, if I remember correctly – which imposes an obligation on companies making payments of dividends or interest to run a checklist to determine whether the recipient might be a conduit or low-substance entity. If so, the paying company must treat the recipient as a look-through entity and apply the withholding tax rates as though the payment goes directly to the ultimate recipient.
Victor Kalgin: I have heard about that decree. It applies to blacklisted or non-cooperative jurisdictions, if I am not mistaken, but similar rules could extend to low-tax jurisdictions as well, since the situations are comparable. The concept is similar to beneficial ownership but called something different in the law – “non-genuine arrangements”, I believe. Have you seen the Cyprus tax authorities applying these rules in practice? I realise the decree is less than a year old, but still.
Marios Palesis: I have not yet seen practical cases, but the decree states that companies must retain this checklist in their records for six years after making a payment, and be ready for inspection by the tax authorities. That is a long period – at some point the tax authorities will begin looking at this, to see whether the checklist was properly maintained and the correct withholding tax rates were applied.
Victor Kalgin: I see. And I think as more Cyprus structures become subject to scrutiny, the Cyprus tax authorities will likely draw on case law from other EU countries, where the beneficial ownership concept is well developed and has been applied in many different contexts over the years, sometimes successfully for taxpayers, sometimes not. Let’s move on.
The next question is a restructuring question. In view of these new rules, some may decide to continue using notional interest deduction or to introduce structures where notional interest deduction replaces former loan arrangements to companies in blacklisted or low-tax jurisdictions. Just to remind the audience: notional interest deduction is the ability to recognise a deemed interest expense based on so-called new equity capital. So even where there is no actual loan – only equity – some notional interest is still recognised for tax purposes in the Cyprus tax return, making structures more tax-efficient. The question is whether the new rules relating to low-tax and non-cooperative jurisdictions will have any impact on notional interest deduction, for example where a shareholder bringing new capital into Cyprus is a company in a blacklisted or low-tax jurisdiction.
Marios Palesis: No – companies can continue benefiting from notional interest deduction regardless of whether the shareholder is in a blacklisted or low-tax jurisdiction. That is a positive development. There are, however, some practical complications. Where a company in a blacklisted jurisdiction has provided a loan to a Cyprus company and now wants to convert that loan into share capital in order to benefit from notional interest deduction, the conversion of the loan into share capital may be treated by the tax authorities as a repayment of interest, triggering withholding tax at the point of conversion.
Victor Kalgin: That is not a surprising conclusion, since accumulated interest is considered paid when it is set off against another obligation, for example the obligation to increase the company’s capital. Given that interest is subject to withholding tax on an accrual basis, the incremental impact of the conversion may not be large, as withholding tax consequences for prior years will already have been accounted for. But to be clear: the conversion may trigger a withholding tax obligation at the point of conversion. That said, the conversion itself cannot be seen as tax avoidance or a non-genuine restructuring without economic purpose, and therefore notional interest deduction should not be challenged on those grounds. No challenge from the Cyprus tax authorities on such conversions has been observed to date?
Marios Palesis: Correct. For today, there has been no challenge from the Cyprus tax authorities on such conversions. I do not believe it would be considered abusive to convert a loan into share capital.
Victor Kalgin: Good news. Notional interest deduction has been in place for a long time, and where conversions of loans into capital have taken place and been supported by genuine economic reasons, those have not been challenged. This gives some comfort that even where withholding tax or denial of deduction might otherwise apply, the conversion of a loan into capital could preserve the tax efficiency of the structure. A final confirmation on this section: the new rules relating to low-tax jurisdictions and non-cooperative jurisdictions apply to payments made by companies to companies, not to individuals or other legal structures. Is that correct?
Marios Palesis: Yes. The rules apply only to entities – companies – not to individuals.
Victor Kalgin: Good news as well. In a couple of conversations I have come across structures where the recipient was a trust in an offshore jurisdiction, and those were not affected. And in another situation, one obvious solution was to liquidate an intermediate holding company in a low-tax jurisdiction and distribute the loan receivable directly to the individual shareholder, and then continue deducting interest.

Victor Kalgin: Let’s move on. The second section is about the definition of a low-tax jurisdiction. As quoted from the legislation: “Low-tax jurisdiction means a third-country jurisdiction in which the corporate tax rate is lower than 50% of the corporate tax rate defined in the respective law” – which is 15% under the new Cyprus corporate income tax rate – meaning that 50% of that is 7.5%. So if a specific country has a corporate tax rate below 7.5%, it is considered a low-tax jurisdiction. As usual, however, the devil is in the detail. There are a number of practical situations: countries with zero or low tax rates; territorial tax regimes in places like Hong Kong and Mauritius; special economic zones or free trade zones such as those in the UAE; and Pillar Two considerations. Are these going to be considered low-tax jurisdictions? What is your view, for example, on UAE free trade zones?
Marios Palesis: Unfortunately, we do not yet have any guidance from the Cyprus tax authorities on how they will apply this definition. What is clear is that the definition refers to the corporate tax rate – not the effective tax rate – of a specific jurisdiction. The aim of these provisions is to capture zero-tax jurisdictions such as the BVI, the Cayman Islands, and so on. As for the UAE, the mainland corporate tax rate is 9%, so UAE mainland companies should not be captured by the low-tax jurisdiction definition. However, the question remains whether a company incorporated in a UAE free trade zone – where the tax rate may be zero – would be subject to corporate tax in the UAE. That remains open to interpretation.
Victor Kalgin: A predictable answer – no guidance yet. The definition in the law is very general. We will need to wait for clarification from the tax authorities, or taxpayers may request a tax ruling in specific cases. Is that a well-developed practice in Cyprus?
Marios Palesis: Yes. Tax rulings are common practice in Cyprus. One can apply for a tax ruling and receive a binding reply from the tax authorities within one month, subject to a fee of €2,000 paid to the government. Alternatively, a reply is available at a later date for a fee of €1,000.
Victor Kalgin: I see. There are other interesting practical instances as well. I will just note that in the UAE, for example, the participation exemption test looks at headline tax rates, and there is some guidance from the UAE authorities which does not allow qualification for the exemption in cases where corporate income tax is only payable upon distribution of dividends rather than on an ongoing basis. Some countries tax profits only upon distribution – Estonia and Latvia within the EU are examples, and Georgia outside the EU is another. Are EU countries automatically excluded from the low-tax jurisdiction definition?
Marios Palesis: Yes. EU jurisdictions are not considered low-tax jurisdictions under these rules. The provisions apply only to third countries. So Estonia, Latvia, and similar EU countries that only tax profits upon distribution are not captured, which is good news. Georgia, being outside the EU, could at least raise a question, but the EU carve-out does not apply to it.
Victor Kalgin: And of course, even where an EU structure is used, it should not be a conduit company set up merely to avoid or postpone the application of withholding tax.
Marios Palesis: Exactly.

Victor Kalgin: Let’s move on to section three: transfer pricing rules and specific situations relating to intra-group transactions. A few words before the questions. Cyprus has transfer pricing rules requiring that transactions between related parties be carried out at arm’s length. If this rule is not followed, adjustments to prices in group transactions may be made for tax purposes, and there is also a possibility of secondary transfer pricing adjustments. My question concerns transactions between two related Cyprus companies, specifically loans granted by one to the other. Suppose the interest rate is not arm’s length – say it is too high – so the deduction for the non-arm’s length portion is disallowed on the borrower’s side. Will there be a corresponding transfer pricing adjustment on the lender’s side? How does this work in Cyprus?
Marios Palesis: Yes. There are provisions in the legislation that stipulate this adjustment. If the Cyprus tax authorities adjust the price of a transaction in one company, they must make a corresponding adjustment in the other. This also applies cross-border, provided it is permitted under the applicable double tax treaty. There is also a separate provision allowing the tax authorities to make an adjustment where an asset of a company is used by a shareholder – treating that use as income for the shareholder, which is taxed in Cyprus. We call this a concealed dividend distribution, and it is subject to tax at 10%.
Victor Kalgin: Let me summarise: if there is a non-arm’s length transaction between two related parties and the tax authorities make an adjustment on one side, it is possible to make a corresponding adjustment on the other side. In Russia, corresponding adjustments are typically only made if the adjustment has been formally made by the tax authorities. Can a taxpayer in Cyprus voluntarily adjust prices in the tax return on both sides, based on a transfer pricing study, without waiting for an audit?
Marios Palesis: I have seen this done in practice without being challenged by the Cyprus tax authorities. I am not certain whether they will maintain this position in the future, but it has been done.
Victor Kalgin: Interesting. And on concealed dividends: if I am not mistaken, this applies specifically where the shareholder is a Cyprus-domiciled individual, and the tax is imposed as a special defence contribution?
Marios Palesis: Exactly. The concealed dividend applies to Cyprus tax residents who are domiciled in Cyprus, and the rate is 10% special defence contribution, whereas the special defence contribution rate for normal dividend distributions to Cyprus tax residents has been reduced to 5%. The legislature’s intention with these new provisions is to address situations where assets are acquired and used privately but held through a Cyprus company.
Victor Kalgin: There was also an old deemed dividend distribution rule where profits not actually distributed were treated as distributed after a period of time. My recollection is that this too was limited to Cyprus-domiciled individuals?
Marios Palesis: Correct. The deemed dividend distribution provisions have been abolished. They applied where the shareholders of the Cyprus company were Cyprus tax resident and domiciled individuals.
Victor Kalgin: I see. And thinking about secondary transfer pricing adjustments more broadly: in some countries, a secondary adjustment leads to a deemed dividend distribution. In those countries, not only could an excessive deduction be disallowed on the non-arm’s length transaction, but the excess amount could also be treated as a distribution. Historically in Cyprus, dividend distributions were not subject to withholding tax, making such secondary adjustments largely irrelevant. But now, in some cases dividends may be subject to withholding tax where the parent company is in a low-tax or non-cooperative jurisdiction. Do you think secondary adjustments resulting in deemed dividend distributions are a real risk?
Marios Palesis: For now, I do not think this is a real threat, because there are no explicit legislative provisions enabling secondary adjustments. However, we have seen the Cyprus tax authorities becoming more assertive in recent years. At some point we may see secondary adjustments in practice, and it remains to be seen whether taxpayers would successfully challenge them.
Victor Kalgin: Agreed. An interesting development to watch.

Victor Kalgin: Let’s move on. The fourth part is about Pillar Two. This is a vast topic and I will only briefly mention that Cyprus, as an EU member state, has followed the international tax reform and introduced Pillar Two rules for multinational companies. These rules affect large multinational groups with consolidated revenue exceeding €750 million. They break down into the so-called QDMTT and UTPR rules, which are aimed at ensuring that in each country the multinational group pays at least 15% tax. In Cyprus, the standard corporate income tax rate is now aligned with that floor, but there are beneficial tax regimes that reduce the effective tax rate. The question is: are the IP box regime and the notional interest deduction regime affected by Pillar Two?
Marios Palesis: Unfortunately, yes. The IP box regime and the notional interest deduction rules are indeed affected under Pillar Two. This relates to very large groups, of course. Since the purpose of Pillar Two is to increase the effective tax rate, both notional interest deduction and the IP box regime are impacted.
Victor Kalgin: That is an expected, if unfortunate, answer. There are, however, planning opportunities within the Pillar Two rules. For example, substance-based income exclusions are possible, where payroll and certain types of tangible assets allow a carve-out of some portion of income from the minimum tax base. The result may still be materially lower than what companies were previously achieving through notional interest deduction and the IP box regime, but there is something to work with.

Victor Kalgin: And the final section: practical cases and observations. Marios, what are the specific practical issues, examples, or recommendations you see in practice or discuss with clients?
Marios Palesis: A few observations. First, during our discussion we mentioned that some tax treatments are in grey areas or await clarification from the tax authorities. What I see from the taxpayer side is that a structure or arrangement is put in place in one year and then forgotten, without going back to revisit it. My strong recommendation is to review your arrangements and structures at least annually, or semi-annually, to make sure they remain correct. I face this issue frequently in practice: taxpayers are too late to adapt to changes. We are in a fast-moving environment – the Cyprus tax system has evolved greatly in the last five years. One of the greatest challenges we face is persuading taxpayers to review their structures regularly and adjust them to avoid exposure.
Another challenge we have faced particularly with Russian clients who had structures in Cyprus and wanted to migrate them to another jurisdiction or liquidate their Cyprus company: we saw the Cyprus tax authorities being somewhat aggressive in some cases – unjustifiably so, in certain instances – and putting pressure on taxpayers either to take legal action against the tax authorities’ decisions or simply pay the disputed taxes. This has been an unfavourable development, and while we do not agree with it, it is the reality.
Victor Kalgin: That is very relatable. Some companies miss opportunities to adjust their structures to the ever-changing tax and business environment. We always try to stay in contact with our clients to keep them informed and to help them adapt. Marios, it has been a real pleasure speaking with you today about Cyprus tax questions, challenges, and developments. Everyone is welcome to reach out to Marios – his contact details will be on the closing slides. Thank you again, Marios. Let’s see how the situation develops, and hopefully businesses can maintain the tax efficiency of their structures going forward.
Marios Palesis: Thank you, Victor, for the opportunity. It has been a pleasure. I am happy to connect with anyone who wishes to reach out. Thank you.