Cyprus Introduces Transfer Pricing Rules and Documentation Requirements

On 30 June 2022, the Cyprus Parliament enacted amendments to the Income Tax Law and the Assessment and Collection of Taxes Law in relation to transfer pricing regulations in accordance with recommendations of the Organisation for Economic Co-operation and Development on Transfer Pricing Guidelines.

The laws will be effective as of 1 January 2022 and once published in the official Gazette.

As per the amended Law, the new TP rules apply to transactions between related parties (legal persons and individuals). For corporate entities, the new law provides detailed rules as to the meaning of the term “related parties” in an effort to capture different relations that there is a “control” situation.

On 30 June 2022, the Cyprus Parliament enacted amendments to the Income Tax Law and the Assessment and Collection of Taxes Law in relation to transfer pricing regulations 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).

The laws will be effective as of 1 January 2022 and once published in the official Gazette. As per the amended Law, the new TP rules apply to transactions between related parties (legal persons and individuals). For corporate entities, the new law provides detailed rules as to the meaning of the term “related parties” in an effort to capture different relations that there is a “control” situation.

The main amendments are in Section 33 (arm’s length principle and related parties definition section of the Tax law) and are the following:

• The introduction of the 25% threshold in defining the relationship or connection of a Cypriot company with another person for Cypriot transfer pricing purposes;
• Removal of the reference to “control” in relation to a partnership; the arm’s-length principle will be interpreted in accordance with the OECD TP Guidelines as amended from time-to-time;
• Advance Pricing Agreements (APAs);
• Introduction TP Documentation File (Local and Master Files) and the Summary Information Table (SIT) and the documentation methods for intercompany transactions.

The amendments will be accompanied by TP regulations regarding transfer pricing (TP) documentation and Advance Pricing Arrangements (APA) which will give more details as the requirements.

The 25% threshold:

A 25% threshold was introduced in Section 33 to define the relationship or connection of a Cyprus company with another company or person for TP purposes as per below:

• If the same person (or persons connected with that person) has, directly or indirectly, at least 25% of the voting rights or of the share capital or is entitled to at least 25% share of the income of both companies.
• Same applies If a group of two or more persons holds, directly or indirectly, at least 25% of the voting rights or of the share capital or are entitled to at least 25% share of the income of each company 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.

Furthermore, a company is connected with another person (or more if they are acting together) if this person holds, directly or indirectly, at least 25% of the voting rights or of the share capital or is entitled to at least 25% share of the company’s income or if that person and persons connected with him together holds, directly or indirectly, at least 25% of the voting rights or of the share capital or are entitled to at least 25% share of the company’s income.

What are the requirements?

As per the new law and OECD requirements the affected taxpayer must firstly submit a summary information table (SIT) which includes intercompany transactions, general information about the group, the profile of the business and the transfer pricing method used. Secondly the taxpayer must prepare a transfer pricing study (TPS) to justify compliance with the arm’s length principle subject to a small size exemption. The small size exemption applies when the controlled transactions cumulatively, per category (e.g. financial transactions, services, goods, IP related income), do not exceed € 750,000 per tax year.

The TPS requirements follow the full OECD guidelines as included in the law including the below key elements:

• Accurate delineation of the transaction (industry analysis and value chain analysis)
• Recognition of the transaction
• Functional and Comparability analysis
• Evidence from similar transactions
• Details of TP method selected as per OECD TP Guidelines
• Comparability adjustments.
• Arms-length range
• Special rules in intangibles, risks allocation, profit splits and financial transactions

The deadline to file is the same as the Income tax return deadline which is 15 months after the end of the tax year.

The Collection and Assessment of Taxes Law has also been amended to accommodate the penalties for non-compliance with the submission deadlines for the TP documentation file and the SIT.

More specifically, the penalty for non-submission of the SIT by the deadline as provided in the Regulations (e.g., the submission deadline of the income tax return) is €500. Moreover, as detailed in the Regulations, the TP documentation file is to be submitted to the Tax Department upon request within 60 days. If the TP documentation file is submitted after the 60th day, the penalties are between €5,000 to€20,000 depending on the delay.

Advance Pricing Arrangements (APA)

The new law also allows the taxpayer to apply APA that was previously agreed with the Cyprus Tax Department and if necessary, with foreign tax authorities as well. The APA will state the nature of the transaction, period of time, methods and comparable used, any assumptions, the involvement or not of tiird parties and other foreign tax authorities. The Cyprus tax authorities must provide its reply to the requested APA within 10 months with a possibility to extent to 24 months by notifications to the tax payer. The APA will be valid for 4 years The Collection and Assessment of Taxes Law has also been amended to accommodate the penalties for non-compliance with the submission deadlines for the TP documentation file and the SIT. More specifically, the penalty for non-submission of the SIT by the deadline as provided in the Regulations (e.g., the submission deadline of the income tax return) is €500. Moreover, as detailed in the Regulations, the TP documentation file is to be submitted to the Tax Department upon request within 60 days. If the TP documentation file is submitted after the 60th day, the penalties are between €5,000 to €20,000 depending on the delay.