Transfer Pricing Developments in Cyprus
On 30 June 2022, the Cyprus House of Representatives approved amendments to the Cyprus Income Tax Law introducing Transfer Pricing documentation compliance requirements. The OECD Transfer Pricing Guidelines have been legislatively incorporated into Cyprus tax legislation and now form an established part of the Cyprus transfer pricing framework for tax years commencing on or after 1 January 2022.
Effective from 1 January 2022, Cyprus tax resident companies and permanent establishments of non-tax resident entities that engage in controlled transactions, as defined in Article 33 of the Income Tax Law, may be required to prepare Transfer Pricing (TP) documentation, subject to the applicable thresholds and conditions. The TP rules regulate controlled transactions between related parties and ensure that the “Arm’s Length Principle” is applied, meaning that transactions between related parties should be carried out under the same market conditions that would apply between independent parties.
Here is a brief summary of the main aspects of the legislation relevant for those involved in transfer pricing arrangements.
1. Applicable to Cyprus tax residents
The transfer pricing legislation applies to Cyprus tax resident persons and Permanent Establishments (PEs) of non-tax resident entities for all transactions undertaken with related parties.
2. Related party definition
One main rule of the law is the introduction of a 25% threshold in defining the connection of a legal entity with another person for transfer pricing purposes.
In practice, two companies are considered related if the same person (and its related persons) or group(s) of persons (under certain conditions) directly or indirectly:
• Hold 25% of the voting rights or share capital of both companies; or
• Have the right to at least 25% of both companies’ income.
A company is also considered related to a person (and its related persons) that directly or indirectly:
• Hold 25% of its voting rights or share capital; or
• Have the right to at least 25% of its income.
Two or more persons are considered related if they act together (or take directions) to directly or indirectly:
• Hold 25% of the voting rights or share capital; or
• Have the right to at least 25% of the profit of a company.
3. Main requirements of the Law
The law provides for two principal documentation requirements for taxpayers in Cyprus.
All taxpayers that engage in controlled transactions must:
• Prepare and submit annually a Summary Information Table containing high-level information on their controlled transactions.
• Prepare and maintain a Transfer Pricing documentation file, consisting of a Cyprus Local File and, where applicable, a Master File, subject to the exemptions outlined below.
3.1 Summary Information Table
The Summary Information Table includes high-level information about the taxpayer’s annual intercompany transactions, including details of the counterparties (including names and tax identification numbers) and the aggregate amounts per transaction category (sale/purchase of goods, provision/receipt of services, financing transactions, receipt/payment of intellectual property licences or royalties, and other controlled transactions).
3.2 Transfer Pricing documentation file
3.2.1 Local File requirements and exemptions
The Local File obligation applies where the aggregate value of controlled transactions within a particular transaction category exceeds the applicable threshold during the relevant tax year.
The current thresholds are:
• Financing transactions: €10,000,000
• Transactions relating to tangible goods: €5,000,000
• All other categories of controlled transactions: €2,500,000
The Local File must be prepared in accordance with the OECD Transfer Pricing Guidelines, refer to the material transactions of the local taxpayer and include a transfer pricing study demonstrating compliance with the Arm’s Length Principle.
3.2.2 Master File requirements and exemptions
The Master File obligation applies only to Cyprus tax resident companies that act as the Ultimate Parent Entity (UPE) or Surrogate Parent Entity (SPE) of a multinational enterprise (MNE) Group with a Country-by-Country Reporting obligation (for example, where the annual consolidated group revenue exceeds €750 million). All other taxpayers are exempt from this obligation.
The Master File must be prepared in accordance with the OECD Transfer Pricing Guidelines and provides a high-level overview of the group’s business in order to place the group’s transfer pricing practices within their global economic, legal, financial and tax context.
More specifically, the Master File should provide an overview of the group’s business, including the nature of its global business operations, organisational structure and overall transfer pricing policies.
4. Advance Pricing Agreement (APA)
The legislation provides for the possibility for Cyprus tax resident companies and permanent establishments of non-tax resident entities to apply for an Advance Pricing Agreement (APA) in respect of current or future domestic or cross-border controlled transactions.
Through an APA, a taxpayer may apply to the Cyprus Tax Department for pre-approval of the selected transfer pricing methodology and/or the pricing of specific existing or proposed controlled transactions with related parties. The Cyprus Tax Department generally issues a decision within 10 months from the date of application. An APA may be valid for a maximum period of four years from the date of application.
The principal benefit of an APA is that it provides taxpayers with greater certainty regarding the transfer pricing treatment of specific transactions.
5. Deadlines and penalties
The TP documentation files and Summary Information Table for a particular tax year should be prepared no later than the due date for submitting the taxpayer’s Income Tax Return for that year, in accordance with the applicable Cyprus tax filing deadlines in force at the relevant time.
The Summary Information Table must be submitted electronically together with the Income Tax Return for the relevant tax year.
Furthermore, the TP documentation file must be be submitted to the Cyprus Tax Department upon request within 60 days.
Where the TP documentation file is submitted after the 60-day deadline, the following administrative penalties may apply:
• Between 61 and 90 days – €5,000.
• Between 91 and 120 days – €10,000.
• If not submitted or submitted after 120 days – €20,000.
In the event of non-submission of the Summary Information Table, an administrative penalty of €500 may be imposed.
How Cosmoserve Can Help
Transfer pricing has become an increasingly important area of international tax compliance, and businesses should ensure that their related party transactions satisfy the Arm’s Length Principle and the applicable Cyprus documentation requirements.
Cosmoserve can assist with:
• Reviewing related party transactions.
• Assessing transfer pricing documentation obligations.
• Advising on Local File and Master File requirements.
• Coordinating the preparation of transfer pricing documentation.
• Assisting with ongoing tax compliance and reporting.
With decades of experience assisting both local and international businesses, Cosmoserve provides practical, reliable and commercially focused advice to help clients meet their Cyprus transfer pricing obligations.
Contact Cosmoserve
If you would like to discuss your transfer pricing obligations or require assistance with Cyprus tax compliance, our experienced team would be pleased to assist.
Email: consult@cosmoserve.com
The contents of this publication are provided for general information purposes only and do not constitute legal, tax or professional advice. Specific advice should always be obtained based on your individual circumstances.
