On 30 June 2022, the House of Representatives of Cyprus voted on and approved amendments in the Income Tax law and the Assessment and Collection of Taxes Law, introducing transfer pricing(‘TP’) rules and documentation requirements in accordance with recommendations of the Organisation for Economic Co-operation and Development on Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (‘OECD TP Guidelines’).
In addition, a tax circular issued by the Cyprus Tax department on 06 July 2023, with effect from 1 January 2022, stating simplification measures for related party transactions that do not exceed the threshold of €750,000 in aggregate value of transactions per category (e.g., goods, services, IP related income, financial transactions etc) per tax year.
Definition of Transfer pricing
Transfer pricing refers to the terms and conditions surrounding transactions between related parties. It concerns the prices charged between associated enterprises established in the same or different countries for their related party transactions, i.e., transfer of goods and services, financing arrangements. Since the prices are set by non-independent associates, it may be the prices do not reflect an independent market price.
TP documentation requirements
In accordance with the new provisions of the Income Tax Law, connected persons which are tax residents in Cyprus, or permanent establishments in Cyprus of non-tax resident persons (liable taxpayers) have the obligation to prepare a TP documentation file and SIT (Summary Information Table) as of 1 January 2022, for transactions falling within the ambit of Article 33 of the Income Tax Law (e.g., related party transactions) subject to the conditions detailed below.
The TP documentation file is to consist of the:
- Master file (if the taxpayer is part of an MNE Group with a Country-by-Country Reporting obligation (e.g., with consolidated revenue above €750 million) and the taxpayer is either the Ultimate Parent Entity (UPE) or the Surrogate Parent Entity (SPE).
- Cypriot local file (local file if the transactions with connected persons either exceed (or should have exceeded based on the arm’s-length principle) the amount of €750,000 in aggregate per category of transaction per tax year)
Summary Information Table (SIT)
The SIT is an additional form (TP return) that should reflect high-level information about the taxpayer’s annual related party transactions, including details of the counterparties, category of related party transactions entered, and amount per transaction category.
The SIT reporting obligation is applicable for all liable Taxpayers on an annual basis irrespective of amounts.
Safe harbours for certain types of financing transactions
|Transactions eligible for safe harbours (< €750,000 in aggregate value of transactions per category)||Safe harbour provision (before the deduction of taxes)|
|1) Financial transactions (i.e., back to back loans or cash advances) between related parties which are funded out of financial means *||Minimum return of 2.5% (after the deduction of allowable expenses)|
|2) Financial transactions (i.e., loans receivables or cash advances) to related parties which are funded out of own funds/capital *||Minimum return should be equal to the yield rate (as at 31 December of the prior tax year) of the 10-year government bond of the country in which the borrower operates, increased by 3.5%
(if the yield rate of the 10-year government bond is negative, the safe harbour rate should be 3.5%)
|3) Financial transactions (i.e., loan payables) from related parties to the extent that the funds are used in the business *||Cost of borrowing must not exceed the yield rate (as at 31 December of the prior tax year) of the ten-year government bond of the Republic of Cyprus, increased by 1.5%.
(if the yield rate of the 10-year government bond is negative, the safe harbour rate should be 1.5%)
|4) Low value-adding services (provided or received, such as IT services, accounting and auditing, legal services, administration services)||5% mark-up on the relevant costs|
* Safe harbour applies to principal amount and any interest charged but not paid.
The Circular mentions that in order to be able to use a safe harbour, the total value of related party transactions within the particular sub-category for which the safe harbour will be used, together with the value of the remaining related party transactions, which belong to the same main category to which the sub-category belongs, should not exceed or should not have exceeded the threshold of €750.000 for the tax year.
Furthermore, the Circular also affects taxpayers with cross-border related party transactions, considering that such arrangements are reportable under mandatory disclosure rules such as DAC 6.