Cyprus raised its corporate income tax rate from 12.5% to 15% with effect from 1 January 2026, following legislation passed by the House of Representatives on 22 December 2025. The change brings Cyprus into line with the OECD/G20 Pillar Two global minimum tax framework and directly affects holding companies, IP-holding structures and intermediate finance vehicles incorporated or tax-resident in Cyprus. International groups with Cypriot entities should review their structures without delay, as the reform also introduces a withholding tax on dividends paid to associated companies in low-tax jurisdictions.
| Parameter | Position before 1 January 2026 | Position from 1 January 2026 |
|---|---|---|
| Corporate income tax rate | 12.5% | 15% |
| Withholding tax on dividends to non-residents (general) | 0% | 0% (general rule retained) |
| Withholding tax on dividends paid to associated companies in low-tax jurisdictions (below 7.5%) | 0% | 5% |
| Withholding tax on interest and royalties paid to non-residents | 0% | 0% (general rule retained) |
| Legislation | Income Tax Law (prior version) | Income Tax Law as amended, passed 22 December 2025 |
What the Reform Covers
The headline change is the increase in the standard corporate income tax rate to 15%. For many internationally structured groups, the practical impact will depend on whether their Cypriot entities qualify under Pillar Two rules as constituent entities of a large multinational group, or whether they fall outside that scope entirely. Regardless of group size, the rate increase applies to all Cypriot tax-resident companies and to Cypriot permanent establishments of foreign entities.
The second material change concerns dividend distributions to associated companies resident in jurisdictions where the effective tax rate falls below 7.5%. Previously, Cyprus imposed no withholding tax on outbound dividends, regardless of the recipient's residence. From 1 January 2026, a 5% withholding tax applies to such payments. Groups that use Cyprus as an intermediate holding layer above entities in low-tax jurisdictions need to map this exposure carefully.
Interest and royalty payments to non-residents remain outside the scope of Cyprus withholding tax under the amended rules, preserving a key feature of Cyprus-based finance and IP structures. However, groups should note that anti-avoidance rules and transfer pricing provisions continue to apply, and the interaction between those rules and the new rate environment warrants review.
Who Is Affected
The reform is directly relevant to:
- Holding companies using Cyprus to hold shares in subsidiaries, particularly where dividends flow downward to low-tax entities;
- IP holding structures benefiting from the Cyprus IP Box regime, whose underlying profits are now taxed at 15% rather than 12.5%;
- Finance vehicles channelling intercompany loans through Cyprus;
- Funds and their management entities regulated by CySEC, where management fee income is subject to corporate tax;
- Newly incorporated entities registered with the Registrar of Companies from January 2026 onward, for whom 15% is the only rate they will have known.
Groups whose structures were calibrated to the 12.5% rate – including those that incorporated in Cyprus specifically because of that rate – may find that certain planning assumptions no longer hold. This includes assumptions built into tax rulings, transfer pricing documentation and intercompany agreements executed before December 2025.
Interaction with Tax Treaties and Anti-Avoidance Rules
Cyprus maintains an extensive network of double tax treaties. The new withholding tax on dividends paid to associated companies in low-tax jurisdictions may interact with treaty provisions in complex ways: where a treaty provides for a reduced or zero withholding rate on dividends, the treaty position will need to be assessed against the new domestic rule. Where no treaty applies, or where a treaty's benefits are subject to principal purpose tests or limitation-on-benefits clauses, the analysis becomes more involved.
Anti-avoidance rules embedded in Cypriot legislation, including provisions implementing the EU Anti-Tax Avoidance Directives (ATAD I and II), remain fully operative. Transfer pricing documentation requirements continue to apply to intercompany transactions. Groups should expect increased scrutiny from the Cyprus Tax Department as the new rules bed in, and the risk of a tax audit on restructured or newly amended arrangements is a practical consideration in any tax risk management exercise.
If you are reassessing whether your group's current Cyprus structure remains fit for purpose under the new rate environment, our team can assist with a focused review. Write to us at info@ferrazwhitmore.com or visit our contacts page.
Immediate Action Items for International Companies
Given that the reform took effect on 1 January 2026 and the legislation was passed in late December 2025, many groups will have had limited time to prepare. The following actions are relevant for most affected entities:
- Map dividend flows. Identify all dividend payments made or planned from Cypriot entities to associated companies, and assess whether any recipient is resident in a jurisdiction with an effective tax rate below 7.5%. Those flows are now subject to 5% withholding tax and require immediate attention.
- Update transfer pricing documentation. Any documentation that references the 12.5% rate as a benchmark – for example in pricing intercompany loans or IP licences – should be reviewed and updated. Stale documentation increases tax audit exposure.
- Review existing tax rulings and advance pricing arrangements. Cyprus tax rulings issued prior to the reform may have been issued on assumptions that no longer hold. Confirm with your advisers whether any ruling needs to be revisited or surrendered.
- Assess treaty positions. For each outbound dividend to a low-tax jurisdiction, assess the applicable tax treaty (if any) and whether treaty relief is available and supportable. Document the analysis in writing.
- Consider Pillar Two obligations. For groups that meet the Pillar Two revenue threshold, assess whether Cyprus entities are constituent entities subject to the global minimum tax, and how the 15% domestic rate interacts with the Income Inclusion Rule or Undertaxed Profits Rule at the parent level.
Structuring Considerations Going Forward
For groups considering Cyprus as a holding or finance jurisdiction for new investments, the 15% rate changes the economics of certain structures, but Cyprus retains features that remain competitively relevant: no withholding tax on interest and royalties paid to non-residents, an extensive tax treaty network, EU membership with access to the Parent-Subsidiary and Interest and Royalties Directives, and a common law legal system with recourse to the District Court for commercial disputes.
The question for most advisers and clients is not whether Cyprus remains useful, but how structures need to be recalibrated. Tax structuring advice specific to Cyprus should take into account the amended rate, the new withholding tax trigger, and the interaction with the group's overall Pillar Two position.
For groups evaluating the wider corporate law implications – including changes to share structures, dividend policies or intercompany agreements held at the level of Cypriot entities – our corporate law practice in Cyprus can assist alongside the tax review.
Separately, individuals holding non-domicile status in Cyprus and connected to Cypriot holding structures should be aware that related changes to the personal tax environment are also in progress. Our analysis of the Cyprus non-dom regime for 2026 sets out the current position.
Next Steps
The reform is in force. Groups that have not yet conducted a post-1 January 2026 review of their Cyprus structures should treat this as a priority, particularly where dividend flows to low-tax jurisdictions are involved. The combination of a higher rate, a new withholding tax trigger, and heightened regulatory attention makes proactive tax risk management essential rather than optional.
To discuss how these changes affect your specific structure, contact Ferraz & Whitmore at info@ferrazwhitmore.com or through our contacts page. We work with international companies, funds and investors across Cyprus and other key jurisdictions and can coordinate cross-border analysis where multiple holding layers are involved.
Sources
- BDO, Cyprus tax reform includes corporate tax rate increase, available at bdo.global. Facts last verified: 22 September 2026.
- Income Tax Law (Cyprus) as amended, passed by the House of Representatives on 22 December 2025.
Disclaimer: This publication is provided for informational purposes only and does not constitute legal advice. The information herein should not be relied upon as a substitute for professional legal counsel tailored to your specific circumstances. Ferraz & Whitmore assumes no liability for actions taken or not taken based on the contents of this material. For advice regarding your particular situation, please contact info@ferrazwhitmore.com.