Transfer Pricing developments in Cyprus

On 30 June 2022, the Cyprus House of Representatives   approved the amendments to the Cyprus Income Tax Law in relation to the introduction of Transfer Pricing documentation compliance requirements. The OECD Transfer Pricing Guidelines have been legislatively incorporated in Cyprus. The new requirements will be implemented for tax years starting from 1 January 2022 onwards.

Effective as of 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, must prepare the Transfer Pricing (TP) documentation, subject to conditions. The TP rules aim to regulate controlled transactions between related parties and ensuring the “Arm’s Length Principle” is applied, ie. the same market conditions that apply for transactions undertaken between unrelated companies are applied to transactions carried out between companies which are related to each other.

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 (PE’s) 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 per cent threshold in defining the connection of a legal entity with another person for transfer pricing purposes.

In practice, two companies are considered as 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 types of requirements for tax residents in Cyprus.

• All taxpayers that engage in controlled transactions must prepare and submit on an annual basis a Summary Information Table that reflects high-level information about the taxpayer’s annual intercompany transactions
• Must prepare, and keep in their records, a TP documentation file that consists of a Cyprus local file and a master file subject to the exemptions listed 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 (incl. names and tax identification codes), and amount per transaction category (sale/purchase of goods, provision/receipt of services, financing transactions, receipt/payment of IP licenses/royalties, other).

3.2 Transfer pricing documentation file

3.2.1 Local file example and exemptions

• The local file obligation is applicable for taxpayers if their transactions with connected persons either exceed (or should have exceeded based on the arm’s-length principle) the following amounts in aggregate per category of transaction per tax year:
  • The threshold of the Finance category is set to €5,000,000 (from €750,000)*
  • The threshold for all other categories is set to €1,000,000 (from €750,000)*

• The local file must be aligned with the OECD TP Guidelines, refers to material transactions of the local taxpayer and includes a transfer pricing study to justify compliance with the arm’s length principle.

                (*Note: Applicable thresholds for the tax year 2022, as  announced on 1 February 2024)

3.2.2 Master file example and exemptions

• The Master File obligation is applicable only for 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 (eg with annual consolidated group revenue above €750 million). All other persons are exempt from this obligation.
• The master file must be aligned with the OECD TP Guidelines and provides a high-level overview of the taxpayers business in order to place the group’s transfer pricing practices in their global economic, legal, financial, and tax context.
• More specifically, the master file should provide an overview of the group business, including the nature of its global business operations, its organisational structure and its overall transfer pricing policies.

4. Advance Pricing Agreement (APA)

• The amended law provides for the possibility for Cyprus tax resident companies and permanent establishments of nontax resident entities  to apply for an APA for current of future domestic or cross border controlled transactions.
• Through an APA a taxpayer can apply to the Cyprus Tax Department  for pre-approval of the transfer pricing methodology selected, and/or the pricing of specific or existing cross-border transactions with related parties. The Cyprus Tax Department  issues a decision within 10 months from the application. The APA can be valid for a maximum period of four years from the date of application.

The main benefit provided by an APA for a taxpayer is the ability to obtain some degree of certainty regarding how the law will be applied in a given set of circumstances.

5. Deadlines and penalties

• The TP documentation files and summary information table for a particular year should be prepared no later than the due date for submitting the taxpayer’s Income Tax Return for that year (eg currently 15 months after calendar year-end).

• The Summary Information Table must be submitted electronically together with the Income Tax Return for the relevant tax year.

• Furthermore, 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 new law provides specific penalty provisions which vary as follows:

Between 61 and 90 days – €5,000 penalty

Between 91 and 120 days – €10,000 penalty

If not submitted at all or after 120 days – €20,000 penalty

In the event of non submission of the summary information table, a €500 penalty is imposed.

How we can help you

Our team of experienced and qualified professionals can assist you to determine whether your business is subject to the regulations in Cyprus and ensure that the relevant requirements are met. Our in-house specialist team working closely with other experts across our international network of firms and other associates can assist with the preparation of TP documentation files as required.

For more information on how we may be able to assist you and your business please contact us at consult@cosmoserve.com or call (00357) 22379210.

We look forward to hearing from you.