Anti-Tax Avoidance Measures

In response to the EU Council Directive 2016/1164, Cyprus has implemented a comprehensive framework of Anti-Tax Avoidance Measures (ATAM) to ensure that multinational enterprises and large domestic companies cannot artificially shift profits out of Cyprus or manipulate their tax positions through aggressive tax planning. These measures apply to corporate entities subject to Cyprus corporate income tax and include rules targeting interest deduction limitations, controlled foreign companies, hybrid mismatches, and general anti-avoidance provisions.

Interest Limitation Rule (ILR)

The Interest Limitation Rule restricts the deductibility of Excess Borrowing Costs (EBC), which are the borrowing costs exceeding 30% of a company’s Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) related to business operations involving fixed and intangible assets. However, there is a derogation where EBC is deductible up to a threshold of €3 million per fiscal year for each company or Cypriot tax group. This rule aims to discourage artificially high interest deductions and excessive profit shifting through financing arrangements. Additional exceptions and clarifications on this rule can be found in Circular 5/2023 by the Cyprus Tax Department.

How the ILR Works

The Interest Limitation Rule is applied through a four-step calculation process that determines how much of a company’s borrowing costs are deductible in a given fiscal year:

Step 1: Calculate EBITDA
Begin by calculating your taxable profits for the year, then add back net borrowing costs (total interest and financial charges minus interest income), depreciation of tangible assets, and amortization of intangible assets. This adjusted figure is your EBITDA.

Step 2: Calculate 30% of EBITDA
Multiply your EBITDA by 30%. This represents the maximum amount of Excess Borrowing Costs that can be deducted under the standard ILR mechanism in the current fiscal year.

Step 3: Calculate Excess Borrowing Costs (EBC)
Add up all borrowing costs incurred during the year (interest on loans, facility fees, guarantee fees, and similar charges), then subtract any interest income received. The resulting figure is your total Excess Borrowing Costs.

Step 4: Determine Deductibility
Compare your EBC to the 30% EBITDA threshold calculated in Step 2. If EBC is below this limit, the full amount is deductible. If EBC exceeds this limit, the excess portion is non-deductible in the current year but may be carried forward to future years (subject to a maximum carry-forward period of up to 5 years, depending on the legislation version applicable to your fiscal period).

€3 Million Safe Harbour

A critical relief mechanism built into Cyprus’s Interest Limitation Rule is the €3 million safe harbour threshold. This provision significantly reduces compliance burden for smaller enterprises and eliminates ILR restrictions for companies with moderate borrowing costs.

How the Safe Harbour Works:

• A company or Cyprus tax group can always deduct up to €3 million of Excess Borrowing Costs per fiscal year, regardless of the 30% EBITDA limitation
• The €3 million threshold applies to each standalone entity or to each tax group as a whole (not allocated per individual transaction or per subsidiary)
• If your annual EBC is at or below €3 million, no EBITDA calculation is required—the ILR does not apply to you
• This threshold effectively removes the ILR burden from the vast majority of small and medium-sized enterprises operating in Cyprus
• The €3 million limit applies independently to each fiscal year; unused portions do not carry over to subsequent years

Key Exclusions from the ILR

Certain entities and activities are excluded from the application of the Interest Limitation Rule:

• Financial Undertakings: Banks, insurance companies, investment firms, and other entities licensed as financial institutions under relevant EU and national legislation are excluded from the ILR
• Long-Term Public Infrastructure Projects: Operating companies that finance and operate qualifying public infrastructure projects may be excluded if the operator, borrowing costs, and underlying assets are all within the EU
• Standalone Entities: Entities that are neither part of a consolidated group for financial reporting purposes nor have any associated enterprises benefit from a simplified application of the ILR with higher relief thresholds
• Equity Financing: Costs associated with equity financing, share capital contributions, and dividend distributions are not treated as borrowing costs for ILR purposes

Carry-Forward of Disallowed Interest

Where borrowing costs exceed both the €3 million safe harbour and the 30% EBITDA threshold, the excess portion that is non-deductible in the current year may be carried forward for deduction in future fiscal years, subject to the same ILR limitations applying in each subsequent year. Key points:

• Carried-forward interest is deductible in subsequent years only to the extent that the company has sufficient headroom (i.e., its EBC in the carry-forward year is below the 30% EBITDA or €3M threshold)
• There is no time limit on the carry-forward period under the current Cyprus legislation
• Unused EBITDA capacity may also be carried forward for up to 5 years and used to increase the deductibility ceiling in future periods
• Companies must maintain detailed records tracking carried-forward amounts year-by-year

Interaction of ILR with Transfer Pricing

Where a Cyprus company has intercompany loans from related parties, the arm’s length interest rate under transfer pricing rules (Article 33 ITL) must be established first. The ILR then applies as a second limitation on the arm’s length amount. In other words: transfer pricing determines the correct rate, ILR determines how much of that correctly-priced interest is deductible. Both rules must be satisfied simultaneously.

CFC Rule — Controlled Foreign Companies

The CFC Rule under Article 11 of the ITL requires Cyprus resident taxpayers to include in their taxable base the non-distributed income of controlled foreign companies where that income arises from non-genuine arrangements put in place for the essential purpose of obtaining a tax advantage.

When Does the CFC Rule Apply?

• Ownership test: The Cyprus entity (alone or with associated enterprises) holds, directly or indirectly, more than 50% of the voting rights, capital, or profit entitlement of the foreign company
• Tax test: The foreign company is subject to an effective corporate tax rate lower than 50% of the Cyprus CIT rate (i.e., currently below 6.25% — half of 12.5%). Note: Although the CIT rate increased to 15% from 2026, the CFC threshold in the legislation remains anchored at 6.25% as enacted
• Income test: The CFC derives more than one-third of its income from passive sources (interest, royalties, dividends, financial activities, or similar categories) unless the CFC carries on substantive economic activity

Non-Genuine Arrangements

A CFC arrangement is considered ‘non-genuine’ to the extent that the CFC would not own the assets or would not have undertaken the risks that generate all or part of its income if it were not controlled by the Cyprus entity where the significant people functions relevant to those assets and risks are carried out in Cyprus.

Key factors the Commissioner may consider:

• Whether the CFC has adequate premises, qualified staff, and equipment in its jurisdiction
• Whether key management and commercial decisions are genuinely made in the CFC’s jurisdiction or effectively directed from Cyprus
• Whether the CFC bears real economic risk or merely assumes contractual risk
• Whether the income-generating activities have genuine substance proportionate to the level of income being earned

CFC Income — Inclusion and Relief

• CFC income is included in the Cyprus entity’s taxable base in proportion to its participation
• Ring-fencing: Each CFC is assessed separately — CFC rules are applied on a per-entity basis, not aggregated across all foreign subsidiaries
• Tax credit: Foreign tax actually paid by the CFC on the included income can be credited against the Cyprus tax liability arising from the CFC inclusion
• Double taxation relief: If the CFC subsequently distributes dividends to the Cyprus entity, the previously included CFC income is not taxed again

GAAR

The General Anti-Avoidance Rule (GAAR) under Article 3A of the ITL empowers the Commissioner of Taxation to disregard an arrangement or a series of arrangements which, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax provisions, are not genuine having regard to all relevant facts and circumstances. ✦ Extended from 2026

What Triggers GAAR?

GAAR operates as a facts-and-circumstances test. There is no bright-line rule — the Commissioner evaluates each arrangement based on:

• Main purpose test: Was obtaining a tax advantage the main purpose (or one of the main purposes) of the arrangement? Legitimate business restructuring with incidental tax benefits typically falls outside GAAR
• Genuineness test: Is the arrangement put into place for valid commercial reasons that reflect economic reality? An arrangement is considered non-genuine to the extent it is not put into place for valid commercial reasons
• Object and purpose test: Does the tax advantage defeat the object and purpose of the tax provision being relied upon?

What Constitutes ‘Valid Commercial Reasons’?

• Operational efficiency, business expansion, market access, or genuine risk management
• Board minutes, internal memoranda, and contemporaneous business plans documenting the commercial rationale
• Whether independent parties would enter into a similar arrangement under comparable circumstances
• Note: Tax reduction alone is NOT a valid commercial reason, but a genuine commercial purpose is not invalidated merely because it also results in a tax benefit

GAAR — Consequences and Mechanics

• Disregard: The Commissioner may disregard the arrangement and compute the tax liability as if the arrangement had not been entered into
• Re-characterisation: Income, deductions, and credits may be re-allocated to the entities or persons that would have borne them absent the arrangement
• Burden of proof: The Commissioner bears the initial burden of establishing that the arrangement was primarily tax-motivated. If established, the burden shifts to the taxpayer to demonstrate valid commercial reasons
• Penalties: Standard penalties for underpayment apply (5% surcharge + interest), but intentional GAAR violations may attract additional penalties under the Assessment and Collection Law
• Statute of limitations: GAAR assessments follow the general assessment limitation period under ACTL Article 23. The Commissioner may issue an assessment within 6 years from the date of submission of the tax return (or amended return), whichever is later — a change from the prior rule which measured 6 years from the end of the tax year. In cases of fraud or wilful default (δόλος ή εσκεμμένη παράλειψη), this period is extended to 12 years (Art. 23(2), as amended by Law 243(I)/2025)

Extension to Individuals (2026) ✦ New from 2026

From 2026, the GAAR has been extended to cover arrangements involving individuals — not just corporate entities. This means personal tax planning structures (trusts, partnerships, nominee arrangements, personal holding structures) may now be subject to GAAR scrutiny. The Commissioner can look through personal arrangements where the main purpose is obtaining a tax advantage that defeats the object of the tax law.

Exit Taxation

Exit taxation under Article 20E of the ITL applies when a Cyprus tax resident entity transfers assets, migrates its tax residence, or moves business activities outside Cyprus, resulting in Cyprus losing the right to tax the unrealised gains on those assets. ✦ Step-Up Extended from 2026

Triggering Events

• Transfer of assets from a Cyprus head office to a foreign PE (where Cyprus can no longer tax the gain)
• Transfer of assets from a Cyprus PE to the head office or another PE in a different jurisdiction
• Migration of tax residence — a company ceases to be Cyprus tax resident (e.g., relocating management and control abroad)
• Transfer of business carried on by a Cyprus PE to another jurisdiction

Calculation of Exit Tax

The exit tax is computed on the difference between the fair market value (FMV) of the assets at the time of exit and their tax book value. The applicable rate is the standard CIT rate (15% from 2026). The FMV may be determined by:

• Independent professional valuation (required for intangible assets and complex portfolios)
• Market quotation (for listed securities and publicly traded instruments)
• Net asset value method (for shares in unlisted companies)
• The Commissioner may challenge the taxpayer’s valuation if it appears understated

Payment Deferral — 5-Year Instalment Plan

Where assets are transferred to an EU/EEA member state, the taxpayer may elect to defer the exit tax payment over five equal annual instalments:

• Each instalment is due on 31 January following the relevant fiscal year
• Interest accrues on the outstanding balance at the rate set by the Commissioner (currently aligned with ECB reference rate + 3%)
• Acceleration triggers: the deferred tax becomes immediately payable if the assets are sold, transferred to a third country, or the taxpayer becomes insolvent
• Security may be required if there is a demonstrable risk of non-recovery

Step-Up Relief (Extended from 2026) ✦ New from 2026

When an entity enters Cyprus’s tax jurisdiction (inward migration), it may elect a step-up of its assets to fair market value at the date of entry. This step-up establishes the new tax base for future disposals, effectively ensuring Cyprus only taxes gains accruing during the period of Cyprus tax residence. From 2026, this step-up relief has been extended from EU countries to all jurisdictions worldwide.

Hybrid Mismatches

The Hybrid Mismatch rules under Article 11A of the ITL, implementing ATAD II (EU Directive 2017/952), target arrangements that exploit differences in the characterisation of financial instruments, entities, or permanent establishments across jurisdictions to achieve double deductions or deduction-without-inclusion outcomes.

Types of Hybrid Mismatches

• Hybrid instruments: A financial instrument (e.g., a profit-participating loan) treated as debt in Cyprus (interest deductible) but as equity in the recipient’s jurisdiction (dividend exempt). Result: deduction without inclusion
• Hybrid entities: An entity (e.g., a partnership) treated as transparent in one jurisdiction and opaque in another, leading to income being neither taxed nor exempt in either
• Hybrid transfers: A transaction treated as a transfer of ownership in one jurisdiction but not in the other, creating dual deductions on the same underlying asset
• Branch mismatches: Income attributed to a foreign PE that is not taxed in the PE jurisdiction because it is attributed to the head office, and also not taxed by the head office jurisdiction because it attributes the income to the PE
• Imported mismatches: A mismatch outcome that originates in a third jurisdiction but is “imported” into Cyprus through a chain of transactions

How Cyprus Addresses Mismatches

Cyprus applies a hierarchical approach:

• Primary rule (Cyprus as payer): If a payment creates a deduction in Cyprus that is not included in the recipient’s taxable income, Cyprus denies the deduction
• Secondary rule (Cyprus as payee): If a payment is deducted in the payer’s jurisdiction but creates an exemption or non-inclusion in Cyprus, Cyprus includes the payment in taxable income
• Dual inclusion rule: Where the same payment is deducted in two jurisdictions, Cyprus denies the deduction unless the other jurisdiction also denies it first

Foreign PE Exemption

Cyprus provides an exemption for foreign permanent establishments (PEs) of Cyprus-resident companies under specific conditions. A company may be exempt from Cyprus tax on profits of a foreign PE if the PE operates a genuine business activity in the foreign country, maintains adequate substance there, and the profits are effectively taxed in the foreign jurisdiction at a rate comparable to Cyprus rates. This exemption encourages Cyprus businesses to expand internationally without double-taxation concerns and aligns with the OECD standard for permanent establishments. ✦ Modified from 2026

Measures Against Low-Tax & Non-Cooperative Jurisdictions ✦ New from 2026

Cyprus has introduced comprehensive defensive measures to counteract profit shifting and tax avoidance through payments to associated entities registered in low-tax jurisdictions (LTJ) or non-cooperative jurisdictions (BLJ). These measures, enacted through amendments effective 10 April 2025, impose withholding taxes and deduction restrictions on dividends, interest, and royalties paid to such jurisdictions while simultaneously requiring substantial economic substance from recipient entities.

Definitions: Low-Tax & Non-Cooperative Jurisdictions ✦ New from 2026

Scope of Application

The defensive measures apply where the recipient of the income is an associated company registered in a BLJ or LTJ (depending on the type of payment) and is not tax resident in a jurisdiction that is NOT a BLJ or LTJ. For the measures to apply, the payment must be made to a company that has a direct or indirect association with the Cyprus company making the payment that exceeds 50%, either alone or together with other associated persons.

• The association test requires more than 50% direct or indirect participation in voting rights, capital, or profit rights
• The rules extend to payments made to Permanent Establishments (PEs) in BLJ/LTJ jurisdictions, regardless of whether the PE is maintained by a company that is NOT in a BLJ/LTJ
• Certain exceptions apply (e.g., payments to companies listed on a recognized stock exchange)

Anti-Abuse Provisions — KDP 109/2025 ✦ New from 2026

An anti-abuse mechanism is integrated within the legislative framework through Ministerial Decree ΚΔΠ No. 109/2025. This provision counteracts arrangements that have been put in place with the main purpose (or one of the main purposes) of obtaining a tax advantage and that lack valid commercial reasons reflecting economic reality.

• Minimum substance requirements and criteria must be met by the recipient entity
• Supporting documentation must be maintained for at least 6 years
• If the substance criteria are not met, the defensive measures (WHT, non-deductibility) apply unless the taxpayer demonstrates valid commercial reasoning
• The burden of proof lies with the taxpayer to demonstrate genuine economic activity

Treaty Renegotiation — Article 34 ITL

Where Cyprus maintains Double Tax Treaties with jurisdictions classified as BLJ or LTJ, and those treaties do not grant Cyprus taxation rights for imposing withholding tax on dividends (for LTJ and BLJ) or interest and royalties (for LTJ), Cyprus will inform the other contracting state within three years to initiate a treaty renegotiation process.

How Anti-Avoidance Measures Interact

Multiple anti-avoidance provisions may apply simultaneously to a single arrangement. Understanding how these measures interact is critical for compliance and tax planning:

DAC6 — Mandatory Disclosure of Cross-Border Arrangements

Under EU Council Directive 2018/822 (DAC6), as transposed into Cyprus law, intermediaries and taxpayers are required to report cross-border arrangements that contain certain hallmarks of aggressive tax planning to the Cyprus Tax Department.

What Must Be Reported?

Cross-border arrangements containing one or more of the following hallmarks:

• Category A: Generic hallmarks linked to the main benefit test (arrangement where one of the main benefits is a tax advantage)
• Category B: Specific hallmarks linked to the main benefit test (use of acquired loss-making companies, conversion of income to capital, circular transactions)
• Category C: Cross-border transactions involving transfer pricing (unilateral safe harbours, hard-to-value intangibles, functional profile changes resulting in significant EBIT decreases)
• Category D: Automatic exchange undermining (arrangements designed to circumvent CRS reporting, structures involving non-transparent legal/beneficial ownership chains)
• Category E: Transfer pricing — specific (use of unilateral safe harbour rules, transfer of hard-to-value intangibles between associated enterprises)

Reporting Obligations

• Who reports: Primarily intermediaries (tax advisors, accountants, lawyers). If no intermediary exists or legal professional privilege applies, the taxpayer must report
• When: Within 30 days of the arrangement being made available, ready for implementation, or the first step of implementation — whichever occurs first
• How: Electronic filing through the Cyprus Tax Department’s TAXISnet system
• Penalties (Section 51A, Law 41(I)/2021, clarified by Interpretive Circular EE 55): Fines are differentiated by violation type:
  • Failure to report a reportable arrangement: €10,000 – €20,000
  • Incomplete or false information submitted: €1,000 – €10,000
  • Failure to provide documents within 14 days of a competent authority request: €1,000 – €10,000
  • Continuing violations or unpaid fines: escalation up to €20,000
  • Annual cap: €120,000 per intermediary or taxpayer (does not apply in cases of fraud)
  • 50% reduction available if non-compliance is rectified before any DAC6 audit and before the statutory return deadline

Commissioner’s Enforcement Powers ✦ New from 2026

Effective from 1 January 2026, the Commissioner of Taxation has been granted significantly expanded enforcement powers to combat tax evasion, non-compliance, and serious violations of tax law. These new powers represent a fundamental shift in the balance between taxpayer rights and tax authority enforcement capabilities.

Share Memorandum and Pledge Registration

Under amendments to the Collection of Taxes Law effective from 1 January 2026, the Commissioner of Taxation may register a memorandum or pledge on the shares of a company or other entity for unpaid tax debts exceeding €100,000. This enforcement mechanism operates as follows:

• The Commissioner may apply to the District Court or Registry of the Registrar of Companies to register a memorandum or charge against shares without requiring the company’s consent
• Once registered, the memorandum acts as a legal lien on the shares, preventing their transfer, sale, or pledge until the tax debt (including interest and penalties) is fully settled
• The registration is published in the official registry and is visible to potential acquirers, investors, and stakeholders
• This power applies to tax debts of €100,000 or more, making it a tool deployed primarily against significant delinquent taxpayers and serious tax violations
• Shareholders may not sell, transfer, or pledge their shares without first clearing the registered tax liability

This enforcement tool is particularly effective against companies that attempt to avoid tax collection by placing assets beyond reach or by transferring shares to relatives or associated entities.

Suspension of Business Operations and Sealing of Premises

Under ACTL Article 32A (as amended by Law 243(I)/2025), the Commissioner of Taxation may suspend business operations and seal the premises of an enterprise. The power is triggered by any of the following four grounds:

• Filing failures (from 1 January 2027 only): Failure to submit at least 2 income tax returns, or at least 12 monthly withholding tax/contribution returns, or at least 3 VAT returns, where such failures occur on or after 1 January 2027
• Unpaid taxes exceeding €20,000: Failure to pay taxes, contributions, or VAT where the total outstanding amount (including surcharges) exceeds €20,000. The amount must be considered final — all administrative and judicial challenge deadlines must have expired or been exhausted
• Invoice/receipt failures: Failure to issue, or issuing inaccurate, tax invoices or receipts as required by law
• Obstruction of tax audits: Obstructing or preventing authorised officers from conducting a tax audit

Procedural safeguards: Before any suspension, the Commissioner must send three separate notifications, each allowing at least 10 days for the business to comply. The final notification requires the business to submit written representations within 5 days. The suspension decision is formally served and published in the Official Gazette.

Duration and enforcement: Suspension cannot exceed 10 days, extendable by up to 20 additional days if non-compliance continues. During suspension, authorised officers (with police assistance) may enter the premises for compliance purposes. If the business remedies the violation, the Commissioner issues a certificate and the suspension is automatically lifted. A change in the legal form or person exercising the business between the time of the violation and execution of the order does not prevent enforcement if the business continues in the same location with the same or similar activities.

Criminal offence: Violating a suspension order — such as operating the business or tampering with seals — is a criminal offence punishable by up to 2 years imprisonment and/or a fine of up to €30,000. Any legal challenge to the suspension does not suspend the business’s obligation to comply with tax laws or the Commissioner’s enforcement powers.

Director and Officer Personal Liability

Existing director liability provisions have been expanded and clarified to extend personal liability of directors, officers, and de facto managers for company tax debts under the following conditions:

• Directors remain personally liable for company tax debts and penalties even after they have resigned from their director positions or been removed from the company register
• Personal liability extends to income tax, corporate income tax, VAT, social insurance contributions, and any related penalties or interest
• This liability may be pursued against the director’s personal assets and cannot be discharged through the company’s bankruptcy or insolvency
• The statute of limitations for director liability claims is extended to match the period for company tax assessments
• De facto directors (individuals exercising control over company decisions without formal board appointment) are treated the same as appointed directors for liability purposes

This expansion prevents tax evasion tactics in which individuals resign as directors immediately before a tax assessment or insolvency to shield themselves from personal liability.

Administrative Fines for Non-Compliance with Documentation Requests ✦ New from 2026

BLJ/LTJ Documentation (ACTL Article 50H, introduced by Law 49(I)/2025): Progressive administrative fines apply where Cyprus paying entities fail to provide the Tax Authorities with supporting documentation for transactions with low-tax jurisdictions (LTJs) or non-cooperative/blacklisted jurisdictions (BLJs) — specifically in connection with dividend, interest, and royalty payments — within 60 days of the Tax Authorities’ request:

• €2,000 for non-compliance between 61 and 90 days (Art. 50H(1)(a))
• €4,000 for non-compliance between 91 and 120 days (Art. 50H(1)(b))
• €10,000 for non-compliance exceeding 121 days or total non-compliance (Art. 50H(1)(c))

Transfer Pricing Documentation (separate regime): A higher progressive structure applies to Local File and Master File documentation requests, on the same 60/90/120-day escalation ladder:

• €5,000 for non-compliance between 61 and 90 days
• €10,000 for non-compliance between 91 and 120 days
• €20,000 for non-compliance exceeding 121 days or total non-compliance
• €500 for non-submission of the Summary Information Table

Note: General ACTL late-filing penalties (Art. 50B) are lower and differentiate by entity type — individuals: €100–€500; companies: €250–€2,000 depending on company size and escalation stage. The BLJ/LTJ and TP documentation penalties above apply regardless of entity type.

Disclaimer

This page provides general information regarding Cyprus tax law and anti-tax avoidance measures as of February 2026. The information is for educational purposes and should not be construed as legal or tax advice. Tax legislation is subject to frequent amendments and judicial interpretation. Specific applications of these rules depend on individual circumstances, corporate structure, and cross-border arrangements. Any person or entity seeking to understand the application of these rules to their particular situation is strongly advised to consult with a qualified tax advisor, chartered accountant, or legal professional licensed to practice in Cyprus. The accuracy and completeness of this information are not guaranteed, and reliance on it without professional advice may result in incorrect tax reporting, assessment adjustments, penalties, and interest charges.

Disclaimer

Please note that the information provided here is for general guidance only and does not constitute professional tax advice. Tax laws and interpretations are subject to change, and individual circumstances can significantly affect tax obligations and benefits.

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