Loans between related parties where a Cyprus Company is involved will now have to bear interest rates as per transfer pricing rules.
The current practice of the minimum interest rate allowable by the Cyprus Tax Authorities on loans between related companies provided for an annual interest rate not lower than 0,35 %.
It has been decided by the Cyprus Tax Authorities that the current rule will be abolished by 30 June 2017. From 01 July 2017 onwards, all financing transactions between a Cyprus Company and a related foreign company must bear an interest rate based on Transfer Pricing Rules, or in other words, must comply with the arm-length principle.
The interest rate of financial transactions like loans or similar instruments must be justified by Transfer Pricing studies, which must be prepared by independent experts, based on the Transfer Pricing guidelines of OECD.
The new rule will be applied on ongoing financial arrangements (loan agreements etc.) conducted before the date of abolishment as well.
As per the announcement of the Cyprus Tax Authorities, the revision of the minimum interest rate for financing transactions between related parties (with the involvement of a Cyprus Company) became necessary based on the BEPS initiative and the Code of Conduct for Business Taxation, as well as per the EU State Aid perspective.
It is expected that the Cyprus Tax Authorities might not require independent Transfer Pricing studies if the interest on loans between related parties is not below certain market averages. However, this remains to be seen.
Cyprus still remains as a place of business with a relatively low tax burden, compared with other EU countries. Cyprus tax rules provide for a total taxation of business profits with 12,5 % corporate tax, payable on taxable profit classes. As Cyprus provides the lowest overall tax burden for both businesses and individuals in the EU, Cyprus Company Formations are increasing. The Cyprus Registrar of Companies reported almost 1.900 Cyprus Company Registrations during the first two months of 2017.