Cyprus: Simplified Transfer Pricing Rules for Annual Transactions below €750.000
The Cyprus Tax Department (“CTD”) published a Circular providing guidance and clarifications to all persons with related party transactions (“Controlled Transactions”) not exceeding €750.000 annually in total. Such controlled transactions are now exempt from the obligation to prepare a Cyprus Local File, for the maintenance of a minimum Transfer Pricing (“TP”) documentation.
The new measures and guidance has been issued on 6 July 2023 and is applicable to Controlled Transactions from 1 January 2022 onward.
In this regard, the taxpayers involved in related party transactions should submit the Minimum TP Documentation to the CTD upon request (within 60 days), to support the arm’s length nature of any of their Controlled Transactions that are not required to be documented in a Cyprus Local File. The new requirements are as follows:
I. The simplified Transfer Pricing documentation should include the following points:
- Summary of functions, assets, and risks analysis
- Description of the entity characterization, based on the results of the functional analysis
- The method selected for the provision of documentation and justification of it
- Economic analysis results compliant with the OECD TP Guidelines.
II. The simplification measures are applicable in the following cases:
- Financing granted through loans or cash advances to related parties
- Financing arrangements with related persons financed by equity
- Financing arrangements (interest-bearing loans, bonds, or cash advances) obtained from related parties and in the business.
- Low value-added services (“LVAS”).
III. The practical application of the new measures will require the following:
- Provision of the required documentation as per above stated conditions.
- For back-to-back financing transactions (i.e. loan receivables) the required net return (before taxes) is set at 2,5% on the average principal of the loan receivable during the year, including any accrued interest.
- For loans/arrangements financed out of equity and/or own funds, the minimum return is equal to the ten-year government bond yield of the borrower’s country of residence plus 3,5% (before tax). The return is calculated based on the average principal of the loan receivable during the year, including any accrued interest.
- For financing arrangements in which the Cypriot entity is the borrower, and the funds have been used for business purposes, the maximum allowable borrowing cost will be calculated based on the ten-year government bond yield of Cyprus of the tax year under consideration, plus 1,5% (before tax). The calculation will be based on the average principal of the loans during the year (plus any accrued interest).
- For low value-added services, as indicated in the circular and the Transfer Pricing guidelines issued by OECD, a minimum return of Cost-Plus 5% will be accepted when the Cypriot entity is the provider of the services. In the cases where the Cypriot entity is the receiver of the services, then the Cost-Plus 5% will be the maximum expense to be allowed.
- The new measures and guidance presented in the Circular apply to cross-border transactions (generally reportable via instruments of DAC6) and domestic transactions between related companies.
The Cyprus Tax Department will not make any downward adjustments if the accounting profit from the Controlled Transactions is higher than the profit generated by the application of the Simplification Measures or the results of a transfer pricing study.
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