On 30 June 2017, the Cyprus Tax Department (“CTD”) published an Interpretative Circular (the “Circular”) which sets out the guidelines to be followed in regards to the taxation of intra-group back-to-back financing arrangements. The new guidelines introduce transfer pricing rules, in line with the requirements of the OECD and are applicable from 1 July 2017.

We set out below the main requirements of the Circular:

1. Definitions and applicability

The Circular applies companies which are tax resident in Cyprus or which have a permanent establishment in Cyprus (in relation to the permanent establishment’s operations). 

The Circular applies to the above entities which carry out intra-group financing transactions (“IGFT”). 
An IGFT is defined as the granting of loans or cash advances remunerated by interest (or should be remunerated by interest) to related companies (as defined in Article 33 of the Income Tax Law), financed by financial means and instruments (e.g. debentures, private loans, bank loans, cash advances etc.). 

2. Application of arm’s length principle to IGFT

The Circular aligns Article 33 of the Income Tax Law with Article 9 of the OECD Model Tax Convention on Income and on Capital and as a result each affected entity will need to ensure that its remuneration on each IGFT is calculated on the basis of transfer pricing principles.
This entails the identification of each commercial and financial relationship with related parties and the determination of the conditions and economic circumstances attaching to those relations in order to accurately determine the relevant transactions. The affected entities should analyse the functions performed, the assets used and the risk assumed for each IGFT.

3. Substance requirements

Entities looking to benefit from the requirements of the Circular must have an actual presence in Cyprus and have the qualified personnel to control the risks and transactions entered into. The Circular provides the following criteria in order justify “actual presence”: 

  • The number of board of Director members who are Cyprus tax residents.
  • The number of board of Director meetings held in Cyprus and the main management and commercial decisions taken from Cyprus.
  • The number of shareholders’ meetings taking place in Cyprus. 
  • Qualified personnel in place to control the risks and transactions. 

4. Simplification regime

An entity meeting the substance requirements mentioned above, and which is engaged purely in intermediary financing activities (i.e. borrowing from related entities and lending to related entities), will be assumed to comply with the arm’s length principle if it receives in relation to its IGFT a minimum return of 2% after-tax on assets (i.e. earning a pre-tax profit margin of 2.2857%). 

Entities following the simplification regime should inform the CTD by completing the relevant filed in their annual tax return.

5. Minimum requirements for Transfer Pricing Analysis
The Circular provides also the minimum requirements for the transfer pricing analysis, which needs to be prepared by a transfer pricing expert (e.g. a licensed auditor):

  • a description of the computation of equity allocation required to assume the risks;
  • a description of the group and the inter-linkages between the functions performed by the entities participating in the controlled transactions and the rest of the group, together with a description of the value creation within the group by the entities participating in the transactions;
  • the precise scope of the transactions analysed; 
  • a list of the searched potentially comparable transactions;
  • a rejection matrix for rejected potentially comparable transactions with justifications. 
  • the final list of comparable transactions which have been selected and used to determine the arm’s length price applied to the intra-group transactions accurately delineated;
  • a general description of market conditions; 
  • a list of all previous agreements on transfer pricing concluded with other countries in relation to the transactions in question;
  • a list of all the previous agreements concluded with entities under analysis which are still in effect at the time of the submission of the request;
  • a projection of the income statements for the years covered by the request.

6. Way forward 

All affected entities will need to proceed with undertaking the required transfer pricing analysis for each IGFT or alternatively, and subject to conditions, the affected entities may opt to use the simplification regime.

C. Savva & Associates Ltd is readily available to assist clients both with identifying any potential impact from the above new guidelines and undertaking the required transfer pricing analysis. For further information or assistance relating to your personal circumstances, contact Mr Charles Savva at c.savva@savvacyprus.com.


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