Cyprus: New Transfer Pricing Rules 2022
The Parliament of Cyprus approved amendments to the Income Tax Law on 30 June 2022, which include new transfer pricing rules applicable from 1 January 2022.
While one group of transfer pricing rules is applicable to all Cyprus companies that reach or exceed an aggregated annual amount of €750,000 per category of transaction with related persons, the other group is applicable to Liable Taxpayers being part of an MNE with an annual consolidated revenue of €750 million and more.
The new transfer pricing rules will come into effect after the publishing of the amendments in the Official Gazette during the next weeks. Following, we briefly explain the key points of the new transfer pricing rules in Cyprus.
Cyprus Transfer Pricing Rules – New Threshold of Related Person
Transfer Pricing Rules apply, among others, to intercompany transactions. Intercompany transactions are transactions between related persons. The definition of related or connected persons has been changed with the new amendment.
The reference to “control” has been abolished. Instead, a 25% threshold of has been introduced to define transactions of a Cyprus company with a related (or connected) person. The 25% threshold applies as following;
- The one and the same person holds at least 25% of the share capital of both companies, or has at least 25% of the voting rights or of rights on income of both companies, directly or indirectly;
- Same as above, but instead of one and the same person, when the one and the same person and persons connected with that one and the same person hold at least 25% … (continued as above);
- Same as 1. Above, but instead of one and the same person, a group of two or more persons holds, directly or indirectly, holds at least 25% of the share capital of both companies, or has at least 25% of the voting rights or of rights on income of both companies, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person with whom that person is connected.
The above 25% threshold is also applicable when two or more person are acting together to secure at least 25% of the share capital of both companies, or has at least 25% of the voting rights or of rights on income of both companies, directly or indirectly, for example, when one or more persons act on direction of one or more other persons.
Required Transfer Pricing Documentation for Cyprus Companies
Liable Taxpayers (Cyprus companies or permanent establishments in Cyprus of non-tax residents) are obliged to prepare transfer pricing documentation and a Summary Information Table (SIT) for intercompany transaction in the sense of the amended Income Tax Law, subject to the following conditions:
- Cyprus Liable Taxpayers being part of a Multinational Enterprises (MNE) are obliged to prepare a Master File, if the Multinational Enterprises’ consolidated annual revenue is above €750 million, or if the Cyprus Liable Taxpayer is either the Ultimate Parent Entity or the Surrogate Parent Entity.
The Master File needs to be prepared with the Income Tax Return, 15 months after the end of the respective calendar year, and must be submitted to the Tax Department upon its request, within 60 days. The Master File must be updated on an annual basis.
- If the Cyprus Liable Taxpayer is not part of a Multinational Enterprises (MNE) with a consolidated annual revenue is above €750 million but its transactions with related (connected) persons exceeds aggregated €750,000 per category of transaction within a tax year, then the Cyprus Liable Taxpayer is obliged to prepare a Local File.
In comparison with a more general Master File, a Local File provides more detailed information on intercompany transactions, compliance with the arm’s-length principle and information regarding the transfer pricing analysis, comparability analyses and the applied transfer pricing method.
Like the Master File, the Local File needs to be prepared with the Income Tax Return, 15 months after the end of the respective calendar year, and must be submitted to the Tax Department upon its request, within 60 days.
Important: The Local File is subject to a Quality Assurance Review (“Sign-off”) by a person certified by ICPAC or any other recognised institute of certified accountants in Cyprus.
Summary Information Table (SIT)
A Summary Information Table is a form, also called TP Return, that reflects high-level information about an obliged taxpayer’s annual intercompany transactions per category- A SIT must be submitted by all Cyprus companies being subject to transfer pricing rules as stated above. A SIT must be submitted together with the Income Tax Return of the respective year.
Advance Pricing Agreements (APAs)
In line with the OECD Transfer Pricing Guidelines, the recent amendments to the Cyprus Income Tax Law introduce the concept of Advance Pricing Agreements (APAs).
Advance Pricing Agreements are voluntary agreements between the Liable Taxpayer and the tax authority/authorities to agree on the transfer pricing methodology for intercompany transaction(s) for a specific period of time, thus providing some degree of certainty to the taxpayer how the tax authority/authorities will apply the law in specific cases. All Liable Taxpayers (taxpayer subject to transfer pricing rules) may enter into an Advance Pricing Agreement. APAs are valid for four up to four years. The Cyprus Income Tax Law, Section 33, provides for three types of Advance Pricing Agreements:
- Unilateral APAs between the Liable Taxpayer and the Cyprus Tax Department;
- Bilateral APAs between the Liable Taxpayer in Cyprus and its foreign related counterparty as well as the Cyprus Tax Department and the tax authority of the country where the foreign counterpart is located; and finally
- Multilateral APAs, which involve the Cyprus Liable Taxpayer and various counterparties in other countries as well as Cyprus Tax Department and the tax authorities of the countries where the foreign counterparts are located.
Penalties for Late Submission
Based on the Collection and Assessment Law amended on the same day, the following penalties apply to Liable Taxpayers in Cyprus:
- Non-submission of the SIT together with the Income Tax Return: €500;
- Delay of submission of Transfer Pricing documentation after requested by the Cyprus Tax Department (deadline is within 60 days):
– delay of 61 – 90 days: €5,000,
– delay of 91 – 120 days: € 10,000,
– delay of more than 120 days or no submission: €20,000.