The Cyprus Tax department issued on 5 January 2023 a circular (1/2023) which terminates as from 1 January 2022 and onwards the application of the simplification measures (“safe harbours”) on financing transactions with related parties.
The simplification measures being either an after-tax interest rate of 2% on loans granted to related parties (intermediary financing companies) or a 10% after tax interest rate on equity (for companies with a functional profile similar to a credit institution) were introduced since 1 July 2017 with the interpretive Circular 3. For those Companies that adopted the simplification measures, there was no obligation to prepare a full transfer pricing study to support the applied interest rate. Only a functional analysis was needed to support the eligibility to apply the simplification measures.
As a result of the above termination, those Companies that used to determine their applied interest rates, for tax purposes, based on the simplification measures should fully adopt the provisions of the new transfer pricing legislation as from 1 January 2022 and determine their financing interest rates based on a full transfer pricing study.
The applicable Transfer Pricing Rules
On 30 June 2022, the Cyprus Parliament approved a new law that introduced details regarding the documentation requirements on transfer pricing. Law and regulations voted are aligned with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
The new rules apply to:
- Transactions between related parties – legal parties and individuals;
- Cypriot tax resident persons;
- Permanent Establishments of non-tax resident entities for certain transactions with related parties;
Types of transactions:
- Sale and purchase of goods;
- Provision and receipt of services;
- IP transactions;
- Financial services;
- Other types of transactions;
A threshold of 25% was introduced for the definition of related party under the new law. According to this new threshold, a company is connected to another company if:
- The same person holds, directly or indirectly, 25% of the voting rights or share capital or has rights to a share of at least 25% of the profits of both companies;
- If the same person and persons connected with that person holds, directly or indirectly, at least 25% of voting rights or share capital or is entitled to at least 25% share of the income of both companies;
- If a group of two or more persons holds, directly or indirectly, at least 25% of the voting rights or share capital or is entitled to at least 25% share of the income of each company and the groups either consists of the same persons or could be regarded as consisting of the same persons by treating a member of either group as replaced by a person with whom that person is connected;
As part of the main requirements of the new transfer pricing framework, a documentation file must be prepared on intragroup transactions that are performed between Cyprus resident companies and permanent establishments of foreign companies in Cyprus. The documentation file consists of the master file and the local file. The documentation file must be maintained in Cyprus for a period of 6 years and provided to the Income Tax authorities within 60 days from the date that a request has been received by the company. The documentation file must also be updated annually. Details are listed below:
- Includes information such as overview of the global group business, the transfer pricing policies used, profit drivers and organisational structure;
- The master file should be prepared by the corresponding due date of the corporation income tax return of the respective tax year;
- Applies to all companies that are ultimate or surrogate parent entities of multinational groups with annual consolidated turnover of over €750 million;
- Includes financial information on specific transactions, a comparability analysis, and details regarding the selection and application of the transfer pricing method used;
- The local file is subject to a Quality Assurance Review by an individual that holds a practicing certificate of ICPAC or any other recognised institute of certified accountants in Cyprus;
- The local file must be prepared by all taxpayers that are involved in controlled transactions by the corresponding due date of the corporation income tax return. Local file obligation is applicable to taxpayers with controlled transactions with connected persons that exceed the amount of €750,000 in aggregate per category of transaction per tax year;
TSI – Table of summarised information:
- This table will include details regarding intercompany transactions (such as details of counterparties, figures per transaction category), the business profile, the transfer pricing method used and overall information about the group;
- Table must be prepared and submitted to the Cyprus tax department by all taxpayers that are involved in controlled transactions by the corresponding due date of the corporation income tax return for a specific tax year;
Advanced Pricing Agreement (APA):
Advanced pricing agreement was also introduced to provide the opportunity for taxpayers to apply for an APA for transactions with their related parties.
According to the APA, a taxpayer can apply to the Tax Commissioner for pre-approval of their selected transfer pricing methodology, of their assumptions and of the pricing of specific of existing cross border transactions with related parties.
The Tax Commissioner must reply with a decision within a period of 10 months from the date of submission of APA. APA is valid for a maximum period of four years from the date of application.
The main advantage behind APA is for taxpayers to obtain some level of confidence regarding how the law will apply to their transaction.
- Penalty for non-submission of the table of summarised information by the appropriate deadline as stated by regulations is €500;
- Transfer pricing documentation file is to be submitted to the tax authorities upon request within 60 days. If the file is submitted after the 60 day period then the below penalties are imposed:
- Submitted between days 61 – 90, penalty is €5,000
- Submitted between days 91 – 120, penalty is €10,000
- Submitted after 120 days, penalty is €20,000
The new Transfer Pricing Rules are effective from 1 January 2022.
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