Navigating Cyprus’s Transfer Pricing Landscape: Insights into Recent Developments

1. Introduction

In continuation of our article issued in October 2022, the Cyprus tax authorities released last summer a detailed Tax Circular, currently only available in the Greek language, concerning the particulars of transactions falling below the Local File threshold of EUR 750,000. This Circular is relevant to taxpayers involved in related party transactions, also known as controlled transactions. This article aims to briefly explain the key elements and implications of this Circular, making it understandable for non-professionals.

2. Key Highlights of the Circular

The said Circular requires taxpayers whose related party transactions are below the threshold of EUR 750,000 per tax year and are thus exempt from maintaining a Local File, to keep simplified documentation protocols. These documentation protocols should include:

1. A short description of the functional analysis, demonstrating functions undertaken, assets used, and risks assumed;
2. A description of the entity’s characteristics based on the functional analysis;
3. A rationale for the chosen Transfer Pricing (TP) method, justifying its appropriateness;
4. The determination of the arm’s length price/remuneration derived from either internal or external comparable.

The Circular introduces “safe harbors” for specific categories of transactions, such as:

• Financing arrangements with related parties involving borrowings, funded out of financial means (e.g., back-to-back loans);
• Financing arrangements to related parties financed out of own capital;
• Financing received from related parties for which the funds are used in the business;
• Low value-added services.

In cases where a taxpayer opts to utilize the safe harbor, only (a) and (b) from the above list shall be maintained in file.

Taxpayers engaged in related party transactions which fall under the following subcategories are assumed to comply with the arm’s length principle if the controlled transactions fall within the safe harbors. The safe harbors covered by the Circular relate to certain subcategories of financing activities, as well as low value adding services, are as follows:

• For loans or cash advances to related parties which are funded out of financial means, the minimum return shall be 2.5% (after taking into account tax allowable expenses); 
• For loans or cash advances receivable from related parties which are funded out of own capital, the minimum return should be equal to the yield rate (as at 31 December of the prior tax year) of the 10-year government bond of the country in which the borrower operates, increased by 3.5%;
• For loans payable to related parties to the extent that the funds obtained are used in the business, the cost of borrowing must not exceed the yield rate (as at 31 December of the prior tax year) of the 10-year government bond of Cyprus, increased by 1.5%; 
• For low value-adding services, a markup of 5% on the relevant costs.

3. Implications and Practical Impact

Obligations for Taxpayers:

Taxpayers opting to utilize a safe harbor are required to declare its usage electronically to the tax authorities in their annual income tax return and maintain adequate documentation that includes details such as a brief description of the functional analysis and a description of the entity’s characteristics.

Reporting & Mandatory Disclosure Norms:

Taxpayers must make the simplified TP documentation available within 60 days of receiving a request from the tax authorities. Furthermore, adherence to DAC 6 provisions could be obligatory when utilizing safe harbors and simplified methodologies. However, a potential exemption exists from DAC 6 reporting for certain transactions, subject to absolute compliance with the given guidelines.

4. Conclusion

The Circular by the Cyprus tax authorities carefully solves the complexities of transfer pricing developments and sketches out simplified protocols and safe harbors for transactions not surpassing the Local File threshold of EUR 750,000. It remains paramount for concerned entities to stay informed about these developments to ensure accurate compliance and to align their tax positions strategically.
Are you seeking more insights or curious about how your business could be affected by the issued Circular? Let’s discuss your personal circumstances during a no-obligations consultation.  Please contact Charles Savva at [email protected] or [email protected].