Cyprus Aligns With EU On Blacklist Rules – Malta’s Different Approach Explained – Corporate Tax

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C.Savva & Associates Ltd (“S&A”), a Cyprus registered company, is authorised and regulated by the Cyprus Securities and Exchange Commission. S&A provides high level Cyprus and international tax advice, assists with the formation and ongoing administration of Cyprus companies, investment funds, international trusts, special license firms and offshore structure.

Cyprus has recently enacted important tax measures that restrict the deductibility of certain expenses involving entities established in jurisdictions considered…

European Union
Tax

Cyprus has recently enacted important tax measures that restrict
the deductibility of certain expenses involving entities
established in jurisdictions considered
“non-cooperative” or “low tax.” These
amendments bring Cyprus in line with broader EU initiatives and
reflect the country’s increasing focus on transparency and
compliance with international tax standards.

Scope of the New Rules

The restrictions apply to expenses incurred by Cyprus
tax-resident companies and permanent establishments that make
direct or indirect payments to related or unrelated entities
resident, incorporated, or otherwise operating in either of the
following categories. First, non-cooperative jurisdictions, which
are jurisdictions listed on the EU blacklist of non-cooperative
jurisdictions for tax purposes. The EU updates this list twice a
year, and it includes countries that fail to meet minimum tax
governance standards or that engage in harmful tax practices.
Second, low-tax jurisdictions, defined as those where the corporate
tax burden is less than 50% of the Cyprus corporate income tax
rate. Given Cyprus’ corporate income tax rate of 12.5%, this
effectively captures jurisdictions with an effective corporate tax
rate below 6.25%.

Categories of Non-Deductible Expenses

Payments falling within the scope of the new rules include
interest expenses, such as those arising from intra-group loans or
other financing arrangements, royalty payments for the use of
intellectual property, and service fees or other deductible charges
that are routed to entities in the targeted jurisdictions. From a
practical standpoint, companies will now need to carefully examine
the nature of their cross-border transactions to determine whether
any of their payments fall within these categories.

Interaction with Cyprus Tax Law

The restrictions are introduced as amendments to the Cyprus
Income Tax Law. The key principle is that while expenses are
generally deductible if incurred wholly and exclusively for the
production of taxable income, they are now expressly non-deductible
if the recipient is based in a low-tax or non-cooperative
jurisdiction. This represents a departure from the previous
framework, where the focus was mainly on the arm’s length
principle under transfer pricing rules. In effect, even if a
payment to a blacklisted or low-tax jurisdiction is priced at
arm’s length, it may still be disallowed entirely for tax
deduction purposes.

Impact on Corporate Structures

This development is particularly relevant for multinational
groups that previously relied on financing, licensing, or holding
structures involving low-tax jurisdictions. For example,
arrangements where intellectual property was owned by an offshore
entity and royalties were paid from Cyprus will no longer be tax
efficient if that entity is based in a targeted jurisdiction.
Similarly, interest payments to group finance companies established
in jurisdictions with very low effective tax rates will face
outright denial of deductibility in Cyprus. Groups using such
structures will need to consider relocating these functions to
jurisdictions that are not caught by the rules, while still
maintaining an acceptable overall tax burden.

Compliance and Risk Management

From a compliance perspective, companies operating in Cyprus
will need to reassess their related-party arrangements and
cross-border transactions. This includes reviewing not only current
payments but also legacy structures that may still generate
deductions in Cyprus. Tax audits are expected to place increased
emphasis on identifying payments routed to blacklisted or low-tax
jurisdictions, and companies that fail to adapt may face higher
effective tax costs as well as potential penalties for
non-compliance.

Strategic Considerations

These measures also reflect Cyprus’ intention to
strengthen its reputation as a transparent and credible
international business centre. By implementing EU-driven
anti-avoidance provisions, Cyprus positions itself as compliant
with global standards while still offering competitive tax benefits
such as the non-domicile regime and the IP Box regime, both of
which remain unaffected. The reforms also underline the importance
of genuine substance, as structures relying on artificial profit
shifting to offshore entities will now be penalised.

Why Malta Has Not Introduced Similar Rules

While Cyprus has moved decisively to implement these
restrictions, Malta has so far chosen not to follow the same path.
Malta’s tax system is built around its long-standing
imputation and refund mechanism, under which companies pay tax at
35% but shareholders may claim significant refunds, often reducing
the effective rate to around 5%. This system is deeply embedded and
Malta may be reluctant to introduce parallel restrictions that
could undermine its overall attractiveness. Unlike Cyprus, Malta
has also delayed full implementation of the OECD’s global
minimum tax framework and prefers a cautious approach to reform.
Instead of directly targeting payments to low-tax or blacklisted
jurisdictions, Malta has focused on strengthening substance
requirements and corporate governance, requiring businesses to
demonstrate real economic activity such as local offices and
management. By evolving gradually rather than through abrupt
reform, Malta preserves stability and predictability for investors,
even while international pressure for alignment continues to
grow.

Looking Ahead

The introduction of restrictions in Cyprus marks a significant
step in the ongoing shift towards greater tax transparency within
the EU. For businesses, this underscores the need to review
existing structures, ensure compliance with the amended Income Tax
Law, and consider restructuring where necessary. At the same time,
the divergence between Cyprus and Malta highlights that EU member
states are not moving in unison. Cyprus has opted for proactive
alignment, whereas Malta has adopted a more cautious stance,
weighing its established competitive advantages against the growing
demands of international tax reform.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.