The Cyprus House of Representatives amended the Income Tax Law and the Assessment and Collection of Taxes Law with regard to transfer pricing (collectively TP legislation)
on June 30, 2022, and authorized those modifications.
By enacting the aforementioned legislative changes, the Organization for Economic Cooperation and Development's recommendations on Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TP Guidelines) will be followed with regard to transfer pricing rules and documentation.
When the laws are published in the Republic's Official Gazette, which is anticipated to happen in the coming weeks, they become enforceable. The TP law will go into effect on January 1, 2022.
The important modifications and general transfer pricing guidelines that will be in effect as of January 1, 2022, are outlined in this Alert.
Income Tax Law (ITL) Amendments and Regulations
Section 33 of the ITL was amended as follows:
- Introduction of a 25% cutoff point for determining a Cypriot company's connection or relationship with another individual for the purposes of Cypriot transfer pricing
- deletion of the phrase "control" in reference to a partnership
- a clause stating that the OECD TP Guidelines, as they may be updated from time to time, will be followed in interpreting the arm's-length principle
- Introduction of the rules regarding the implementation of the OECD TP Guidelines, the information contained in the TP Documentation File (Master and Local Files), the Summary Information Table (SIT), as well as the techniques of documentation for intercompany transactions
- The concept of advance pricing agreements (APAs) introduced
Additionally, the Council of Ministers would then issue transfer pricing guidelines for APAs (the Regulations) and TP documentation. The specifications for TP documentation and the process for APAs will be covered in more detail in the Regulations.
The Regulations and the corresponding legislative amendments will be effective from January 1, 2022.
The following is a summary of the main clauses.
Introduction of 25% relationship or connection threshold
In order to define the connection or relationship between a Cypriot company and another individual for transfer pricing-specific purposes, Section 33 of the ITL has been modified to include, among several other things, a percentage.
Following the aforementioned changes, a company is associated with another company in the event that:
- if the same individual indirectly or directly owns a minimum of 25% of the voting rights, the share capital, or the right to at least 25% of the income from both enterprises.
- if the same individual, or people linked to that person, direct or indirect, owns a minimum of 25% of the voting rights, the share capital, or the right to at least 25% of the income from both companies.
- If a group of two or more individuals retains, whether directly or indirectly, at least 25% of the voting rights, of the share capital, or are entitled to at least 25% share of the income from each company, and also the groups either comprise of exactly the same people or may be viewed as comprising of the same people by handling (in one or even more cases) a participant from either group as replaced by an individual with whom that person is linked
A corporation is also linked to another individual if they jointly hold, either directly or indirectly, at least 25% of the voting rights or even the share capital or are eligible for at least 25% of the company's income or if they individually hold at least 25% of the voting rights or the share capital or are eligible for at least 25% of the company's income with those they are linked to.
At last, any two or more individuals acting jointly to obtain, either directly or indirectly, at least 25% of the voting rights, the share capital, or are entitled to a minimum 25% share of the company's income must therefore be regarded as linked with each other and with any individual acting at their direction to obtain, either directly or indirectly, at least 25% of the voting rights, the share capital, or is obligated to at least 25% share of the company's income.
TP documentation requirements
According to the new ITL provisions, linked individuals who are tax residents in Cyprus or permanent establishments of non-tax residents in Cyprus (Liable Taxpayers) are required to create TP documentation files and SITs for transactions falling under Section 33 of the ITL (such as intercompany transactions), according to the terms or conditions outlined below.
The TP documentation file is to consist of the:
- Master File
- Local Cypriot File (Local File)
The master file includes standardized information that is pertinent to group members of a multinational enterprise (MNE) in accordance with OECD TP Guidelines. To help tax administrations assess whether there is a substantial transfer pricing risk, the Master File must further particularly give an overview of the MNE group's operations, such as the essence of its global business operations, its general transfer pricing policies, as well as its global allocation of income and economic activity. The master file's overall goal is to give a broad overview of the MNE group's transfer pricing practices in the context of the world's economic, legal, financial, and tax systems.
In accordance with the Administrative Cooperation in the field of Taxation Law, Liable Taxpayers who serve as the Ultimate Parent Entity (UPE) or Surrogate Parent Entity (SPE) for Country-by-Country Reporting purposes are subject to the master file obligation.
More particularly, if both of the following circumstances are true, Liable Taxpayers will be subject to a master file obligation:
- The taxpayer is a member of an MNE Group that is required to submit country-by-country reports (for example, if its consolidated revenue exceeds €750 million).
- The Ultimate Parent Entity (UPE) or Surrogate Parent Entity (SPE) is the Taxpayer.
Deadline for preparation
By the deadline for filing an income tax return for the relevant tax year, the master file must be ready (for instance, currently 15 months after the calendar year-end).
Deadline for submission
The master file should be made accessible by the obligated tax payer at any time following the closing date for preparation and delivered to the tax department within 60 days of the department's request.
Every year, the master file must be updated, and any material modifications to the market situation that could affect the data and information in the master file must be specifically mentioned.
The local file makes reference to material transactions of the municipal taxpayer in close agreement with OECD TP Guidelines. The local file assists in achieving the goal of ensuring that the taxpayer has abided with the arm's-length principle for its significant transfer pricing positions, in comparison to the master file, which offers the high-level overview mentioned above. The information pertinent to the transfer pricing analysis of transactions involving linked parties is the primary priority of the local file (as defined in Section 33 of the ITL). These details would include the choice and use of the most suitable transfer pricing method, pertinent financial data concerning those particular transactions, as well as a comparability analysis.
If Liable Taxpayers' transactions with linked persons total more than €750,000 in aggregate per category of transaction per tax year, those transactions are subject to the local File obligation (or should have been relevant to it under the arm's-length principle).
Any individual with a practicing certificate from ICPAC or another recognised institute of certified accountants in Cyprus should be required to sign off on the local file as part of the quality assurance review process.
Deadline for preparation
The local file must be ready by the closing date for filing an income tax return for the relevant tax year (for instance, it is currently 15 months after the calendar year-end).
Deadline for submission
The local file must be made accessible by the obligated taxpayer at any time following the closing date for preparation and delivered to the tax department within 60 days of a request.
The local file must be updated yearly, and specific mention must be made of any material modifications to market circumstances that might have an effect on the data and information contained therein
The SIT is a separate form (TP return) that must contain high-level details about the taxpayer's yearly intercompany transactions, such as data concerning counterparties, the type of intercompany transactions engaged in, as well as the amount for every type of transaction.
All Liable Taxpayers are subject to the SIT reporting requirement on a yearly basis.
Deadline for submission
Along with the income tax return, the SIT must be forwarded to the tax department.
Advance Pricing Agreement (“APA”) procedure
An APA is a voluntary agreement that enables the parties to decide ahead of time on the transfer pricing technique for any specified intercompany transaction(s) for a set amount of time. It can be made among a taxpayer and one or even more tax authorities. More particularly, an APA chooses a suitable set of standards (such as a method, comparables, and the proper adjustments thereto, and critical assumptions about future events) to be used for a predetermined amount of time in relation to particular controlled transactions that were completed in accordance with the arm's-length principle. The possibility of obtaining some level of certainty concerning how the law will be implemented in a specific set of circumstances is the key advantage an APA offers to a taxpayer.
Eligibility and types of APAs
The Liable Taxpayers have access to APAs. Multilateral, bilateral, and unilateral APAs are permitted by general provisions of the Regulations.
- The only parties to a unilateral APA are the Cyprus Tax Department and the Liable Taxpayer.
- The Cyprus Tax Department, the foreign tax authority, the Liable Taxpayer, and its counterparty that is not a Cypriot are all parties to a bilateral APA.
- The Liable Taxpayer, its counterparties with whom it has connections outside of Cyprus, the Cyprus Tax Department, and foreign tax authorities are all parties to a multilateral APA.
The Liable Taxpayer shall give a corresponding APA application to the relevant authority of all applicable foreign tax authorities in the event of a multilateral or bilateral APA.
Timeframe and validity
The Tax Commissioner must either approve or deny an APA request inside of 10 months of it being submitted to the Tax Department. The Tax Commissioner may extend the deadline by up to 24 months after receiving notice from the applicant.
The APA is effective for a maximum of four years.
The Regulations include mechanisms for the modification, cancellation, or abrogation of an APA subject to a variety of conditions such as, among many others, major changes in the critical assumptions mentioned in the APA, the Liable Taxpayer's failure to adhere to the APA's terms and conditions, modifications to the law, or adjustments to a double tax treaty having an impact on the APA.
Amendments to the Collection and Assessment Law
Penalties for missing the due dates for filing the SIT and TP documentation file have been added due to the addition of the Collection and Assessment Law.
More particularly, the fine is €500 if the SIT is not submitted by the closing date specified in the Regulations (such as the due date for filing the income tax return).
Furthermore, in accordance with the Regulations, the TP documentation file must be delivered to the Tax Department within 60 days of receiving a request. The following penalties apply if the TP documentation file is admitted after the 60th day:
- The fine is €5,000 if it is submitted anywhere between 61 and 90 days.
- The fine, if submitted anywhere from 91 and 120 days, is €10,000.
- The fine is €20,000 if it is not submitted or if it is submitted only after the 120th day.