A. Introduction
As from July 2017, transactions between related parties are reviewed under Transfer Pricing Guidelines in order to identify the tax treatment and compute any tax amounts.

Therefore all related companies’ transactions in which Cyprus Tax Resident Companies are involved, are obliged to follow the arm's length principle.

B. Transfer Pricing and Arms’ Length Transactions
Transfer prices are the prices at which companies transfer goods and provide services to related companies.
Arm’s Length Transactions (ALT) are defined as the transactions that should be valued as if they had been carried out between unrelated parties, each acting in its own best interest.

Article 9 of the OECD provides that in the case where the terms of two related companies in their commercial or financial relations differ from those of independent parties, then any profits that should have been accrued, (provided that the same terms of independent parties applied), may be included in the profits of the company and taxed accordingly.

C. Reasons for Transfer Pricing Preparation
The below are a few of the reasons that forced OECD to impose transfer pricing guidelines:

  • Increasing integration of national economies;
  • Growth of Multinational Enterprises (MNEs);
  • Countries right to tax profits where the income and expense arises.

D. Transfer Pricing Study (TPS)
TPS is defined as the document to be provided to the Cyprus Tax Authorities as a supporting document, evidencing that the transaction which took place, was based on the Arms’ Length Principle.

There are two key steps in such study:
1. To identify the commercial or financial relations between the related companies and the conditions and economically relevant circumstances, and
2. Compare the comparable transactions between the unrelated companies.

Regarding the first step, the TPS should include the following:

  • Review of contractual terms and actual conduct of the transaction;
  • Functional analysis;
  • Risk analysis (Risk Management, Control over risk, Risk mitigation, Risk assumption, Financial Capacity to assume risk, Risk allocation, etc.);
  • Economic circumstances (geographic locations, size of markets, competition, government regulations, etc.);
  • Business strategies (innovation, product development, diversification, duration, risk aversion, etc.).

There are two main transfer pricing methods in relation to the first step:
1. Traditional transaction method – comparable uncontrolled price method, resale price method and cost-plus method.
2. Transaction profit method – transactional net margin method and transactional profit split method.

The choice of a transfer pricing method, in relation to the first step, always aims at finding the most suitable method for the specific case.

For the second step, i.e. to compare the comparable transactions between the unrelated companies, the usual process is as follows:
1. Determination of years to be covered;
2. Broad-based analysis of the taxpayer’s conditions;
3. Functional analysis;
4. Review of existing internal comparable;
5. Determination of external comparable transactions;
6. Selection of the most appropriate transfer pricing method;
7. Identification of potential comparable transactions;
8. Determination of and making comparability adjustments and;
9. Determination of the arm’s length remuneration.

The OECD guideline includes standards for the transfer pricing documentation. OECD recommends three transfer pricing documentation as follows:
1. A master file
2. A local file and
3. A country by country report

E. Conclusion

Transfer pricing is a very big and complex chapter and requires in depth analysis, which would be difficult to cover in one article alone.  This first attempt is intended to provide general knowledge of the requirements, and to briefly describe TPS requirements.  TPS requires specialized knowledge and expertise in order to be prepared.

Savva & Associates aims to work with clients to ensure their Cyprus, international and personal structures are established and administered to the highest level of international standards. Our highly experienced and qualified team will ensure the correct structuring of your Companies and provide comprehensive advice in all VAT and Tax related matters.For further information please contact Mr Charles Savva at c.savva@savvacyprus.com who will be happy to further assist you.


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