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The tax reforms that came into effect on 1 January 2026 signal a shift on how the tax authorities treat holding companies.  The focus of the new changes is moving away from purely formal compliance and towards economic substance and proper corporate governance. In practice, this means that companies are increasingly expected to demonstrate real activity and decision-making in Cyprus rather than relying on paper-only structures.

Key Changes Under the 2026 Reform

1. Withholding Taxes on Outbound Dividends

Under the new rules, withholding tax may apply depending on the jurisdiction of the recipient company.More specifically, dividends paid to companies established in low-tax jurisdictions may be subject to a 5% withholding tax, while dividends and interest paid to companies in EU-blacklisted jurisdictions may be subject to a 17% withholding tax.

These measures make the jurisdiction of the shareholder, the ownership structure, and treaty eligibility increasingly important when planning outbound payments.

2. Constructive Dividends

Another important concept introduced by the reforms is that of constructive dividends.This applies where a company provides a benefit or transfers value to a shareholder (or a person related to the shareholder) without formally declaring a dividend. Although no official dividend distribution takes place, the transaction may still be treated as a distribution of profits for tax purposes.

3. Abolition of the Deemed Dividend Regime

The reforms have abolished the deemed dividend distribution regime, which previously resulted in the automatic taxation of retained earnings at shareholder level. Although the regime has been removed, targeted anti-abuse rules will apply during a transitional period. These rules are intended to prevent companies from artificially retaining profits or carrying out non-commercial restructuring purely for tax purposes.

4. Greater Emphasis on Substance and Governance

The reforms confirm Cyprus’s move towards a substance-based approach to taxation. Companies are now expected to demonstrate that:

• Real decision-making authority exists in Cyprus
• The functions and income of the company reflect its commercial purpose
• The structure is not merely passive or artificial

Structures that lack sufficient substance may face greater scrutiny, particularly under Controlled Foreign Company (CFC) rules and the Principal Purpose Test (PPT) under the Multilateral Instrument (MLI).

What This Means for Cyprus Holding Companies

Under the new framework, any transfer of value from the company to its shareholders (or related persons) that is not supported by a formal dividend declaration may potentially be treated as a constructive dividend.

This means that even if no dividend is formally declared, “hidden distributions” may arise where shareholders receive indirect benefits from the company.

Where the shareholder is a Cyprus tax resident and domiciled individual, such constructive dividends may be subject to 10% Special Defence Contribution (SDC).

Impact on Tax Planning

Following the changes to Cyprus tax law, transactions between a holding company and its shareholders should be carried out at an arm’s length in order to reduce the risk of constructive dividend treatment. It is therefore advisable that any transfer of assets, loans, or benefits be properly documented and commercially justified.

Corporate Governance and Compliance

As a result of the reforms, holding companies will likely need to strengthen their internal governance procedures. In particular, companies should ensure that they are able to monitor and document:

• The personal use of company assets by shareholders or related parties
• Loans granted to shareholders or related parties
• Other transactions that may not be carried out on commercial terms

This inevitably increases the compliance burden, but it also helps reduce the risk of unintended tax consequences.

Interaction With Other Tax Rules

Dividends received from subsidiaries will generally continue to benefit from the Cyprus participation exemption, meaning that they remain exempt from Cyprus tax under certain conditions. Constructive dividends, however, are treated separately for SDC purposes where value is extracted by a shareholder or a related party.

Strategic Considerations

In light of the reforms, holding companies should reconsider their distribution and shareholder benefit strategies. In particular, it may be advisable to:

• Avoid providing personal benefits through company assets
• Ensure that shareholder loans are commercially justified and properly documented
• Consider whether formal dividend distributions may be more appropriate

Indeed declaring a formal dividend and paying the applicable 5% SDC may be more efficient than risking the reclassification of a transaction as a constructive dividend subject to 10% SDC.