As of 1 January 2022 regulations apply for transfer pricing in Cyprus, “transactions between related companies – intra-group transactions”, which are defined as transactions between persons whose direct or indirect connection amounts to a percentage equal to or greater than 25%. The provisions are in line with the Organization for Economic Co-operation and Development – OECD Guidelines and are applicable to both businesses and tax authorities.
Transfer pricing Documentation Files and Quality Assurance Review
Cyprus transfer pricing Documentation File
Obliged to maintain a transfer pricing Cyprus Documentation File are Cyprus companies or Cyprus permanent establishments, whose intercompany transactions with related companies (Two companies including companies tax residents of Cyprus are considered related if the same person (and related persons) (under certain conditions) directly or indirectly own 25%) in total per category of transactions exceed or should exceed if carried out on an arm’s-length principle basis of, 750 thousand euros per tax year. Transaction categories relate to goods, services, rights, and other intangible assets and financial transactions. The content of the Cyprus Documentation File should be similar to the OECD recommendations. That is, it focuses on the analysis of the financial and operational profile of the Cyprus company or Cyprus permanent establishment, the market conditions where it operates, the analysis of the documentation methodology of its relevant transactions, and the comparison or reference data.
Transfer pricing Basic Documentation File or Master File
A transfer pricing Basic Documentation File or a Master File is drawn up by Cyprus companies that are the ultimate parent entities of a multinational group or have been designated as surrogate parent entities by the group to which they belong, which for the year preceding the year under review has a consolidated revenue of more than 750 million euros. General information about the group is included in the Master Documentation File.
Documentation Files are subject to quality control review
The Documentation Files that are drawn up are subject to quality control review by approved persons who hold a practicing certificate of ICPAC or any other recognized institute of certified accountants in Cyprus no later than the date of the obligation to submit the tax return of the taxpayer. Transfer pricing Documentation Files are made available to the Cyprus Tax Department within 60 days after they have been requested. The Files are updated every tax year.
Obligation to prepare a Summary Table of Information
Obligation to prepare a Summary Table of Information, which presents a summary of entity’s-intercompany transactions, and the tax jurisdictions and tax identities of the entities with which the transactions took place. The Summary Table of Information is submitted electronically to the Tax Department of Cyprus together with the tax return of each Cyprus company or Cyprus permanent establishment.
Possibility of applying for pre-approval of the transfer pricing methodology (Advance Pricing Agreement).
It is possible to apply for pre-approval of the transfer pricing methodology for specific future or existing transactions of Cyprus companies or Cyprus permanent establishments with related persons to the tax department of Cyprus.
The tax department of Cyprus decides within 10 months (the decision time can be extended up to 24 months) from the application submission and the decision is communicated to the applicants. The duration of validity of the pre-approval decision may not exceed four years and its temporal validity may not refer to a tax year that has passed at the time of the submission of the pre-approval application.
The pre-approval decision is considered binding but can be revised during its validity, either upon application, or ex officio by the tax department in cases of incorrect or materially changed assumptions and data, as well as in case of an application for a mutual settlement procedure.
Charges and fines
In non-compliance with the relevant documentation obligations of intercompany transactions, a fine of between €5,000 and €20,000 will be imposed depending on the days of delay in compliance. In case of delay in submitting the Summary Table of Information, the fine amounts to €500.
Frequently asked questions as clarified by the Cyprus Taxation Department:
1. If the controlled transactions in Category “A” cumulatively exceed €750.000 or shall exceed €750.000 on the basis of the arm’s length principle as described in article 33(9)(a) of the ITL and at the same time the controlled transactions in Category “B” cumulatively do not exceed the €750.000 threshold in a tax year, is there an obligation to include the controlled transactions of Category “B” in the Cyprus Local File?
No, there is no obligation to include Category’s “B” controlled transactions in the Cyprus Local File.
Only, the controlled transactions of a category that cumulatively exceed or shall exceed €750.000 on the basis of the arm’s length principle during a tax year must be documented and analyzed in the Cyprus Local File.
In this specific example, it will be Category’s “A” controlled transactions only.
2. How is the €750.000 threshold being determined in the context of rental income activities during each tax year?
The threshold is determined by reference to the total rental income on the basis of the arm’s length principle in a tax year.
3. Do purchases and sales need to be aggregated for the purposes of assessing whether the threshold has been exceeded?
Yes, the threshold is based on reference to the absolute values of the controlled transactions for each category occurring in a tax year.
For example, if total purchases and total sales amount to €400.000 and €500.000 respectively, the cumulative amount in this category is € 900.000. Thus the threshold in this category has been exceeded.
4. Is the Cyprus Local File and Summary Information Table prepared using the tax year or the accounting year of the company?
The Cyprus Local File and Summary Information Table are prepared with respect to the tax year.
5. Under which category of the Summary Information Table should Financial Guarantees be reported?
Financial Guarantees should be reported under the category “Financial Transactions”.
6. Should a Benchmarking study be prepared every tax year or only if something changes with regard to the intra-group loans?
A Benchmarking study should be prepared when intra group loan is initiated and updated when:
(i) new loans are provided or received by the company, or
(ii) significant terms of the existing loans change or amended, or
(iii) the functional profile of the company changes, or
(iv) the market and economic conditions change significantly (if applicable).
The above list is indicative and not exhaustive. Further guidance is provided in the OECD TP Guidelines.
Plenote that in accordance with article 33(10) of the ITL, the master file (where applicable) and the local file shall be updated every tax year.
7. Who is responsible for the completion and submission of the Summary Information Table?
It is the responsibility of the taxpayer to complete the Summary Information Table. The Summary Information Table shall be submitted by the Statutory Auditor or Tax Consultant.
8. Is the circular dated 30/06/2017 with the title “Tax treatment of intra-group back-to-back financing transactions” still applicable following the enactment of the new TP Legislation and Regulations?
The Back to Back circular was abolished as of 01/01/2022.
9. How is the €750.000 threshold in the context of loan financing activities being determined in a tax year?
The threshold in the category of loan financing transactions is determined only by reference to the loan principal including interest charged but not paid.
10. Continuing from question 9 above, which balance is relevant in the case of loan financing activities (e.g. year end, average balance for the year, facility amount)?
The maximum loan balance (i.e. only the loan principal including interest charged but not paid) during the tax year should be used to determine the threshold in the respective tax year and be reported in the Summary Information Table.
11. Should the loans or any other monetary facilities including cash withdrawals (but excluding any balances arising from commercial transactions) granted by companies to the persons described in article 5(1)(z) & 5(2)(z) of the Income Tax Law L. 118 (I)/ 2002 be taken into account for the purposes of assessing whether the threshold of €750.000 has been exceeded in the category of financing activities?
No, provided the company which is granting the loans or any other monetary facilities including cash withdrawals to its directors or to its shareholders who are individuals or their spouses or to their relatives up to and including the second degree of kinship does not have as a taxable activity the provision of financing.
In this specific case only, such balances should not be taken into account for the purposes of assessing whether the threshold of €750.000 has been exceeded in the category of financing activities and as such should not be reported in the Summary Information Table. No documentation with respect to these specific transactions in the local file is required
12. Company A borrows from a related Company B or a related individual B, the amount of €1.000.000 to buy shares of the same amount.
The shares with an acquisition cost of the amount of €1.000.000 fall under the definition of “titles” as per article 2 of the Income Tax Law L. 118 (I)/ 2002 and circular 2008/13.
Should the transaction be as described above:
12.1 be documented in the Cyprus local file?
12.2 be excluded from the Summary Information Table?
In the case of Company A only (i.e. the Borrower), the transaction shall not be documented in the Cyprus local file and it shall be excluded from the Summary Information Table to the extent that the interest incurred does not constitute a tax-deductible expense in accordance to the provisions of articles 11(15) and 11(16) of the Income Tax Law L. 118 (I)/ 2002 and any other related Tax Circular that is in force.
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