As we navigate through 2025, Cyprus continues to strengthen its position as a sophisticated international business hub while adapting to evolving global tax regulations. The island nation has introduced significant legislative changes that will impact how multinational corporations and international businesses structure their operations.
At C2Z Advisory, we have analysed the latest developments to bring you a comprehensive overview of what’s changed, what’s coming, and how these updates might affect your business strategy in Cyprus.
New defensive tax measures target low-tax jurisdictions
One of the most significant developments in Cyprus tax legislation came in April 2025 when the House of Representatives passed two crucial laws introducing defensive tax measures. Law No. 47(I)/2025 and Law No. 48(I)/2025 introduce new defensive tax measures aimed at low-tax jurisdictions.
These measures represent Cyprus’s continued commitment to aligning with international tax standards while maintaining its competitive edge. The legislation targets explicitly arrangements with Low-Tax Jurisdictions (LTJs) and reinforces existing provisions for EU-designated Blacklisted Jurisdictions (BLJs).
What qualifies as a low-tax jurisdiction
LTJs are defined as jurisdictions with a corporate tax rate less than 50% of Cyprus’s rate, currently 12.5%. This means any jurisdiction with a corporate tax rate below 6.25% will now be subject to these defensive measures.
The new rules, effective from January 1, 2026, introduce:
- 17% withholding tax (WHT) on dividend payments to associated companies in LTJs
- Non-deductibility of interest and royalty payments made to associated companies in LTJs for corporate income tax purposes
For businesses with existing structures involving such jurisdictions, this creates immediate planning requirements. The next year’s effective date provides a window for restructuring, but early action will be essential.
Enhanced pillar two implementation
Cyprus has officially transposed the EU Pillar Two Directive into domestic law with “The Global Minimum Tax Assurance for Multinational Enterprise Groups and Large-Scale Domestic Groups in the Union Act of 2024”.
This development brings Cyprus fully into compliance with the global minimum tax framework, which is reshaping international tax planning and administration. The law will enter into force as from fiscal years starting on or after 31 December 2023 and applies to multinational enterprise groups (“MNEs”) or large-scale domestic groups with annual revenue exceeding EUR 750 million in at least two of the four fiscal years immediately preceding the tested budgetary year.
The implementation includes two key mechanisms:
- The Income Inclusion Rule (IIR) requires Ultimate Parent Entities (UPEs) to pay a top-up tax if their foreign subsidiaries are taxed below the minimum rate.
- The Undertaxed Profits Rule (UTPR) will act as a backstop rule to the IIR.
What’s particularly noteworthy is that the law also introduces a domestic top-up tax (“DMTT”) set to be effective for fiscal years starting on or after 31 December 2024.
Corporate tax environment remains competitive
Despite these new defensive measures, Cyprus remains one of Europe’s most attractive corporate tax environments. The headline corporate income tax rate is 12,5%, maintaining its position as the lowest among ASEAN member states.
The tax framework includes several business-friendly features that remain unchanged:
Territorial tax system benefits
A company which is tax resident in the Republic is taxed on income accruing or arising from sources both within and outside the Republic. Still, the system operates on territorial principles for foreign income. This means sophisticated tax planning remains possible within the new regulatory framework.
Extensive exemptions continue
Key exemptions that make Cyprus attractive for holding companies remain in place:
- Dividend income (note 8) The whole amount
- Interest income (excluding interest income arising in the ordinary course of business or closely connected with the ordinary carrying on of the business), The entire amount
- Foreign exchange (FX) gains, except FX gains arising from trading in foreign currencies and related derivatives (note 6) the entire amount
VAT updates provide opportunities and challenges
Cyprus has implemented several significant VAT adjustments that businesses should take into account when planning for 2025.
New reduced rate category
The reduced rate of 3% was introduced on July 21, 2023, and applies to several categories, including books, newspapers, periodicals, and various medical devices and appliances.
Temporary zero-rate extensions
Several essential goods remain subject to 0% VAT until 31 December 2025: Baby milk, baby diapers, adult diapers, and products for feminine hygienic protection—certain types of fruits and vegetables.
Residential property VAT changes
The residential property sector has seen significant updates. As of 1 November 2023, there are new provisions for the application of the reduced VAT rate of 5%. According to the new rules, The reduced VAT rate of 5% applies on the first 130 square meters of the buildable area and up to a total value of €350.000, provided that the total value does not exceed €475.000 and the buildable area does not exceed 190 square meters.
Strategic Planning Considerations for 2025
These legislative changes create both challenges and opportunities for international businesses operating in or through Cyprus.
Immediate action items
Businesses should conduct comprehensive reviews of their current structures, particularly those involving:
- Payments to low-tax jurisdictions
- Related party transactions that might be affected by the new withholding taxes
- Transfer pricing documentation requirements
Long-term strategic opportunities
Despite the new defensive measures, Cyprus retains significant advantages:
- Cyprus has entered into 28 free trade agreements (FTAs) with key trade partners
- The extensive double taxation treaty network spans nearly 100 countries
- The IP regime continues to offer an 80% deemed deduction that applies to the profit from the exploitation of such qualifying intangible assets
Compliance and reporting updates
The regulatory environment has become more demanding, with enhanced reporting requirements across multiple areas.
Transfer pricing documentation
Transfer pricing documentation (e.g., Local File, Master File, and simplified documentation) for a particular year should be prepared no later than the due date for submitting the taxpayer’s Corporate Income Tax Return for that year.
DAC6 and DAC7 requirements
Both DAC6 and DAC7 reporting requirements remain in full force, with penalties for non-compliance varying depending on the type of infringement, with a maximum of €20.000 per arrangement.
Looking ahead: Strategic recommendations
The Cyprus tax landscape in 2025 reflects a jurisdiction balancing competitive positioning with international compliance requirements. While the new defensive measures represent an additional layer of complexity, they shouldn’t overshadow Cyprus’s continued attractiveness as a business domicile.
Key strategic considerations include:
Use the transition period before January 2026 to evaluate current structures involving low-tax jurisdictions. Ensure robust transfer pricing documentation and substance requirements are met to support business structures. For large multinational groups, early preparation for Pillar Two calculations and potential top-up taxes will be essential. The new measures create competitive advantages for Cyprus-based structures compared to some alternative jurisdictions.
Conclusion
Cyprus continues to evolve as a sophisticated international business centre. While 2025 brings new compliance requirements and defensive measures, the jurisdiction’s fundamental attractions remain strong. The key to success lies in understanding these changes early and adapting business structures to work within the new framework.
At C2Z Advisory, we’re here to help you navigate these changes and identify opportunities within Cyprus’s evolving tax landscape. The combination of competitive rates, extensive treaty networks, and business-friendly regulations continues to make Cyprus an attractive choice for international business structures.
