TaxLegi 28.04.2025

1. Effective 1 January 2026, dividend payments to associated companies in low-tax jurisdictions (LTJ) will incur a 17% withholding tax (WHT).
2. Interest and royalty payments to associated companies in LTJ will not be deductible for corporate tax purposes starting from the same effective date.
3. The legislation also amends existing provisions for withholding tax on payments to companies in EU "blacklisted" jurisdictions (BLJ), effective upon publication in the Official Gazette.
4. Taxpayers should assess the impact on cash flows, ownership structures and existing financing arrangements.

Executive summary

On 10 April 2025, the Cyprus House of Representatives passed legislation introducing defensive measures against low-tax jurisdictions (LTJ). More specifically, dividend payments made to associated companies in LTJ will be subject to withholding tax (WHT) at the rate of 17%. In addition, interest and royalty payments made to associated companies in LTJ will not be deductible for corporate tax purposes. The measures against LTJ will enter into effect on 1 January 2026.

The legislation also amends existing provisions that require WHT on dividend, interest and royalty payments made to companies in European Union (EU) "blacklisted" jurisdictions (BLJ). These amended provisions will enter into effect once the law is published in the Official Gazette, which is expected to occur in the next couple of weeks.

The measures are supplemented by general anti-abuse rules (GAAR) and treaty renegotiation provisions.

Detailed discussion

In alignment with the milestones set under Cyprus's Recovery and Resilience Plan, and in response to international commitments for enhancing tax transparency and fairness, the House of Representatives voted on 10 April 2025, to introduce a comprehensive framework of defensive tax measures aimed at companies located in BLJ and LTJ.

Overview of new measures

The defensive measures repeal the existing framework applicable to BLJ and replace it with a broader and more robust regime that extends to LTJ. The new rules impose a combination of WHT and expense denial rules depending on the nature of the payment and the classification of the jurisdiction. The table below summarizes the rules.

Jurisdiction definitions

BLJs are those included in the EU list of non-cooperative jurisdictions (Annex I) at the time of the transaction and in the previous calendar year.

LTJs are those with a corporate tax rate that is lower than 50% of Cyprus's corporate tax rate (the current CIT rate is 12.5%).

Scope and application

The defensive measure will apply where the recipient of the income is an associated company registered in 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 measure to apply, the payment must be made to a company that has a direct or indirect association with the Cypriot company making the payment that exceeds 50%, either alone or together with other associated persons. The law includes a definition as to when a person is considered associated with another person.

The rules also 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.

General Anti-Abuse Rule

A GAAR mechanism is embedded into the framework to counteract arrangements lacking commercial substance that are primarily designed to circumvent the application of the defensive measures. Essentially, the GAAR is aiming to combat arrangements for interposed entities that are not in BLJ/LTJ. If relevant criteria are not met, the defensive measure will apply unless the taxpayer demonstrates valid commercial reasoning. The Council of Ministers is expected to issue a decree in the next few weeks providing additional information, such as the qualifying criteria.

Treaty renegotiation provisions

In cases where Cyprus maintains tax treaties with jurisdictions classified as BLJ or LTJ, and those treaties do not grant taxation rights to Cyprus for imposing WHT on dividends (LTJ and BLJ) and interest and royalties (LTJ), the law states that the Cyprus Republic will inform the other contracting state within three years to initiate a treaty renegotiation process.

Implications

Businesses engaging in cross-border activities involving LTJ and/or BLJ should assess the impact of the defensive measures. Key considerations include:

• Understanding relevant features of the new rules and how this could impact existing or future cash flows
• Reviewing the ownership structure to determine if any of the shareholder companies may fall within the ambit of the new rules and whether dividend WHT could apply
• Reviewing existing intragroup financing and intellectual property (IP) licensing arrangements to evaluate exposure to WHT or denial of expense deductions
• Confirming adequate documentation of commercial substance for payments made to associated companies in jurisdictions that are not BLJs or LTJs
• Anticipating treaty changes that may alter the treatment of payments under current tax treaty protections

Next steps

Taxpayers should consider undertaking a comprehensive review of affected structures and arrangements and consider proactive restructuring where appropriate. Guidance should also be sought on substance requirements under the GAAR.

For additional information, please contact our team:

Philippos Raptopoulos

Partner, Head of Tax & Legal Services

philippos.raptopoulos@cy.ey.com

Petros Krasaris

Partner, Head of International Tax and Transaction Services

petros.p.krasaris@cy.ey.com

Petros Liassides

Partner, Direct Tax Services

petros.liassides@cy.ey.com

Myria Saparilla
Partner | Direct Tax Services
Myria.Saparilla@cy.ey.com

Anna Papamichael
Partner | Direct Tax Services
Anna.Papamichael@cy.ey.com

Eleni Sofocleous
Partner | Direct Tax Services
Eleni.Sofocleous@cy.ey.com

Panayiotis Tziongouros
Partner | International Tax and Transaction Services
Panayiotis.Tziongouros@cy.ey.com

FuelEU Maritime: What Pooling Companies need to know

The FuelEU Maritime was previously discussed in TaxLegi editions from 2024: February, August, November and March 2025. The purpose of this article is to present its implications for Pooling Companies.

Pooling of Compliance

Pooling is a regulatory mechanism under the FuelEU Regulation that allows the compliance balances for Greenhouse Gases (hereafter as ‘GHG’) intensity of two or more ships - from the same or different companies - to be combined. This pooling is essential for companies aiming to meet the GHG intensity targets and, if applicable, the Renewable Fuels of Non-Biological Origin (RFNBO)  subtarget.

Pool establishment

The first step to establish a pool is registration in the FuelEU database. The company must register its intention to include the ship’s compliance balance in a pool. This registration must detail the allocation of the total pool compliance balance to each individual ship and the choice of the independent pool verifier. Once it is done, the pool arrangement requires validation of all participants. Namely, where ships participating in the pool are controlled by two or more companies, all companies involved must validate the pool details in the FuelEU database.

Pool arrangements

A pool is only valid if the total pooled compliance is positive. Ships with a compliance deficit, cannot end up with a higher compliance deficit, and those with a compliance surplus cannot end up with a compliance deficit after the allocation of the pooled compliance. In addition, a ship can be included in a pool only if holds a valid FuelEU document of compliance. In case where a total pool compliance balance results in a compliance surplus for an individual ship, the company can bank it for the future reporting period. When ships participating in the pool are controlled by two or more companies, all companies must agree and validate the pool details in the FuelEU database. It is important to be aware that the Regulation does not establish any costs associated with participation in a pool. These arrangements are left to private agreements between the parties involved. Such flexibility allows companies to negotiate terms that suit them the most. This is a field where contractual relationships along with other sustainability, tax and VAT implications will need to be validated in anticipation of any agreements between the various parties.

Management of the Pool

The management of the pool is the responsibility of the company that registers the pool in the FuelEU database. An independent verifier is essential to ensure that the allocation of compliance balances is accurate and compliant with the Regulation.

According to the BIMCO Clause for Time Charter Parties, charterers have the right to instruct owners to pool any compliance balance if the charter period covers a complete reporting period. This provision empowers charterers to actively participate in the compliance strategy of the vessels they charter. However, in the relationship between the shipowner and the shipmanager, as indicated in the BIMCO Shipman Clause, the shipowner is the one who ultimately decides on the pooling arrangements.

Conclusion

By skillfully arranging pools, companies can generate significant profits for climate-ambitious ships and also enable less sustainable vessels to comply with the regulation, avoiding penalties. What is more, by providing financial gains for vessels decarbonization, pooling companies can also indirectly support demand for zero- and low-emission fuels and contribute to decarbonization of the maritime sector in their intermediary role.

By:

Martyna Szlufik | Senior | Green Tax

On 4^th of April 2025, the Tax Department announced the availability of a new tool on the Tax Portal website for the search and verification of the Tax Identification Number (TIN) of employees.

Through this tool, employers can verify whether an employee is registered in the Tax Department’s Registry by entering the individual’s ID number or alien registration card (ARC) number along with their date of birth.

It is important to note that access to the tool is restricted to employers who have:

• Submitted at least one Employer’s Return (Form T.D.7), or
• Made at least one payment of withheld tax (code 0100) for the period starting from 01/01/2021, onwards.

A related guide has been posted on the TAX FOR ALL website under the GUIDES sections, which you may refer to for further information.

EY Cyprus remains at your disposal for any information and / or clarifications required. 

According to Circular 03/2025 issued by the Cyprus Tax Department, guidance is provided regarding the VAT treatment of vouchers that have an expiration date and remain unredeemed after that date. The new Circular supplements Circular 235, dated 9 July 2019 and aims to clarify the VAT implications for both single-purpose and multi-purpose vouchers following their expiration.

Key takeaways

1. Multi-Purpose Vouchers: As defined in Circular 235, multi-purpose vouchers are subject to VAT only upon redemption. Therefore, in cases where such vouchers expire without being redeemed, no VAT arises, since no taxable transaction has occurred.
2. Single-Purpose Vouchers: In line with Circular 235, single-purpose vouchers are subject to VAT at the time of issuance. If such vouchers are not redeemed by their expiry date, no VAT adjustment is permitted. The VAT accounted for at the point of issuance remains final.

How we can help

Our team of VAT specialists is available to advise on the VAT implications of voucher schemes and their VAT reporting, as well as support with any questions or compliance needs that may arise from this Circular. 

For additional information, please contact our team:

George Liasis

Partner, Head of Indirect Tax Services

Phone: +357 22 209 759

E-mail: George.Liasis@cy.ey.com

Georgios Pitsillis

Director, Indirect Tax

Phone: + 357 22 209 787

Email: Georgios.Pitsillis@cy.ey.com

Maria P. Raspa

Director, Indirect Tax

Phone: +357 22 209 712

Email: Maria.Raspa@cy.ey.com

Elpida Papachristodoulou

Director, Indirect Tax

Phone: +357 22 209 907

Email: Elpida.Papachristodoulou@cy.ey.com

Simos Simou

Director, Indirect and Environmental Taxes

Phone: +357 22 209 894

Email: Simos.Simou@cylaw.ey.com

Iacovos Kefalas

Senior Manager, Indirect Tax

Phone: +357 22 051 683

Email: iacovos.kefalas@cy.ey.com

FuelEU Maritime: What Charterers need to know

The FuelEU Maritime was previously discussed in TaxLegi editions from 2024: February, August, November and March 2025. The purpose of this article is to present its implications for charterers. The information presented below is based on the BIMCO clause for Time Charter Parties.

Obligations of Charterers

Charterers have several key obligations under the FuelEU Maritime Regulation. First of all, they must ensure that the vessel is supplied with fuels complying with bunker specifications. If applicable, fuels and energy must also be certified and documented to meet sustainability and Greenhouse Gas (hereafter as ‘GHG’) emissions saving criteria. In addition, if the Charter Period continues beyond 1^st January 2030, charterers must pay for the electricity used for the vessel’s power demand at berth.

One of the most important obligations of a time charterer is the payment of a surcharge. It is due when the aggregated Compliance Balance has a negative value. Then, charterers are required to pay the surcharge to the owners on a monthly or per voyage basis. Another payment to be aware of is supplementary payment of liquidated damages. Namely, if the vessel has a negative Compliance Balance for at least two last consecutive complete Reporting Periods, charterers must pay liquidated damages upon redelivery of the ship.

Rights of Charterers

Charterers simultaneously possess important rights, playing a crucial role under the FuelEU Maritime implementation. To start with, they are entitled to reimbursement in case when negative aggregated Compliance Balance was reduced or eliminated (provided that a surcharge has been paid on a monthly or per voyage basis within that specific Reporting Period).

However, the most powerful right is the option to decide on the flexibility mechanisms, namely banking, borrowing or pooling of compliance. This flexibility allows charterers to manage their compliance more effectively and can lead to financial benefits. The right is valid provided that the Charter Period covers a complete Reporting Period.

Banking and borrowing are flexibility mechanisms available for both GHG intensity compliance and, if applicable, also for the RFNBO subtarget. Banking allows company to carry forward a positive compliance surplus from current reporting period to the future. Conversely, borrowing enables company to take a credit form the following reporting period. Pooling enables one ship's over-compliance to balance the underperformance of other vessels (even from other companies), as long as the overall pooled compliance remains positive. This approach not only rewards over-compliance but also encourages investments in more advanced technologies.

Conclusion

Charterers have a significant role to play in the decarbonization of the maritime sector. By understanding the mechanisms of the FuelEU, they can do it while simultaneously achieving financial benefits for their companies. The effective management of flexibility mechanisms can lead to a more sustainable and economically viable operation in the shipping industry.

Martyna Szlufik | Senior | Green Tax

By:

Martyna Szlufik | Senior | Green Tax