Transfer Pricing 2024 Comparisons

On 30 June 2022, transfer pricing (TP) regulations were voted on and incorporated into the Cyprus Income Tax Law, with effect from 1 January 2022. Cyprus has thus introduced broad TP regulations requiring OECD-compliant TP documentation, based on BEPS Action 13 recommendations.

On 30 June 2017, the Cyprus tax authorities published a circular on back-to-back financing arrangements, with effect from 1 July 2017 – this was abolished on 5 January 2023 (with effect from 1 January 2022) following the introduction of the TP regulations.

The circular required that a comparability analysis for the purpose of describing intra-group financing transactions be performed for determining the applicable arm’s-length remuneration. The main factors examined in the comparability analysis are the requirements for sufficient equity level for assumption of risks and adequate substance in Cyprus.

The new TP regulations, effective from 1 July 2022, require the following.

A summary information table (SIT) must be completed and submitted electronically by all taxpayers by the same deadline as for tax returns.

The SIT includes information on related parties with which the company transacts, and the nature and value of the transactions. The nature of the transactions is divided into categories including:

• goods;
• services;
• intellectual property and intangibles;
• financial transactions; and
• other transactions.

A local file must be prepared when the materiality threshold of EUR5 million in the category of financing transactions and EUR 1 million in the remaining categories is met.

The thresholds consider the aggregate amount of each category and are based on reference to the absolute values of the controlled transactions for each category occurring in a tax year.

Local files should be prepared for the local entity, and must include:

• the company’s management and organisational structure;
• a general description of the activities of the group;
• the group structure;
• the key competitors;
• the relevant financial information, including the audited financial statements;
• the summary schedules of the relevant financial data; and
• an explanation of the use of the TP results to arrive at taxable income.

Also, local file preparers should include:

• a description of the controlled transactions;
• copies of the intercompany agreements;
• a detailed functional analysis with respect to each documented category of transaction;
• the selection and application of the most appropriate TP method;
• the conclusion of the arm’s length price;
• any relevant adjustments; and
• the decision of the advance pricing agreement (APA) or tax ruling, if any.

The auditor of the company must review the Cyprus local file to ensure its quality by the deadline of submission of the corporation tax return for the tax year in question.

A master file must be prepared when the consolidated revenues of the group exceed EUR750 million.

The required information for the preparation of a master file relates to the strategies and policies followed by the group, rather than the entity. The contents of the master file must include:

• the group organisational structure;
• a description of the multinational enterprise’s (MNE) business activities, including the drivers of business profit;
• the TP policies of the group; and
• the geographic markets for the group’s products and services.

Additionally, the group’s intangibles must be listed, together with the MNE’s intercompany financial activities and tax positions.

The following assumptions apply.

For the local file, persons that engage in controlled transactions with arm’s length value of less than EUR5 million per annum in the category of financing transactions or less than EUR1 million in the remaining categories in aggregation (ie, sale/purchase of goods, provision/receipt of services, financing transactions, receipt/payment of intellectual property licensing/royalties, etc) are exempt from the obligation to prepare a Cyprus local file. However, they must prepare simplified TP documentation, as per Circular 6/2023 on simplification measures for entities not exceeding the local file threshold. Such entities may also be eligible to apply the applicable safe harbour rule set by the tax authorities.

For the master file, only Cyprus tax-resident entities that are the ultimate parent or surrogate parent entity of an MNE group falling under the scope of country-by-country reporting have an obligation to prepare and maintain a master file. All other persons are exempt from this obligation.

It should be noted that the threshold for the requirement of local file preparation was initially set at EUR750,000 per category of transactions. This threshold was subsequently increased on 1 February 2024, with retroactive effect from 1 January 2022 onwards, following an announcement by the Cyprus tax authorities.

The TP documentation file should be maintained by the taxpayer in electronic or paper format, and should be prepared in a generally acceptable language, preferably in English. However, the Cyprus tax authorities may request its translation into Greek if necessary.

The documentation file must be maintained in Cyprus for six years, and must be provided to the tax authorities within 60 days from the date that a relevant request has been received by the company or by any other company that is authorised by the company to act as its representative. It must also include a special chapter explaining the events affecting the information and data included in the documentation file and that are related to changes in the market conditions.

The documentation file must be updated every tax year, and the update must be completed within 12 months from the end of the tax year in which the need for the update has arisen. The Commissioner of Taxation has the power to determine specific issues concerning updates that are deemed necessary regarding the content of the documentation file, either on an annual or permanent basis.

In February 2023, the Cyprus tax authorities, in an effort to ensure clear interpretation of the TP regulations and their correct application and practice, published Frequently Asked Questions providing answers to the most common queries of both taxpayers and TP practitioners. The Commissioner of Taxation will also issue further guidance as to the requirements of the documentation file and the summary table, acceptable TP methods, and the methods of establishing the interquartile range or the profit margin.

Also, in an exchange-of-information context, Cyprus implements country-by-country reporting requirements under the Assessment and Collection of Taxes Law Decree of 2017.

It is important to note that although Cyprus is not a member of the OECD, the Cyprus tax authorities refer to OECD materials for guidance in the field of taxation.

The arm’s length principle has been incorporated into Section 33(3) of the Cyprus Income Tax Law and shall be interpreted in line with the OECD TP Guidelines.

Said section defines associated enterprises, providing the following 25% relationship test.

A company is connected with another company where:

• a person and persons connected with that person hold, directly or indirectly, a participation in at least 25% of the voting rights or share capital or have the right to a share of at least 25% of the income of both companies; or
• a group of two or more persons holds, directly or indirectly, a participation in at least 25% of the voting rights or share capital or has a right to a share of at least 25% of the income of each company, and the group either consists of the same persons or could be regarded as consisting of the same persons by treating a member of either group as replaced by a person with whom they are connected.

A company is connected with another person where:

• a person and persons connected with that person hold, directly or indirectly, a participation in at least 25% of the voting rights or share capital or have a right in at least 25% of the income of that company; or
• a group of two or more persons acts together with the intention of securing, directly or indirectly, at least 25% of the voting rights or share capital or right to a share of at least 25% of the income of a company.

The Cyprus tax authorities suggest that the methods used by taxpayers are in line with the methods specified in the OECD TP Guidelines, which are the following:

• comparable uncontrolled price (CUP) method;
• resale price method (RPM);
• cost-plus method (CPM);
• transactional net margin method (TNMM); and
• profit split method (PSM).

It used to be common practice in Cyprus to use the capital asset pricing model (CAPM) for fully functional financing companies. However, further to the publication of Circular 7/2023 on 7 July 2023 by the Cyprus tax authorities, the most appropriate method for determining the arm’s length pricing for financing transactions, including those of a back-to-back nature, is the CUP method. The application of the CAPM will only be permitted in exceptional cases, upon a preapproval in the form of a ruling obtained by the Cyprus tax authorities. The Circular is effective from the tax year 2023.

Cyprus has no hierarchy on the selection of the most appropriate method. The approach adopted by the Cyprus tax authorities is in line with OECD guidance, which urges practitioners to assess each case differently and to conclude on the most appropriate method on a case-by-case basis – though where a CUP exists, it should be preferred.

Cyprus does not require the use of ranges or statistical measures.

The Cyprus tax authorities require comparability adjustments to be performed where reasonably accurate.

Cyprus introduced an intangible property (IP) regime, which is in line with the OECD’s guidance and development. Specifically, the Cyprus IP regime is in line with both the provisions of the OECD BEPS Action 5 on “Harmful tax practices” and with EU rules.

The Cyprus IP box regime applies to qualifying IP which is developed in Cyprus. In order for a Cyprus IP holding company to benefit from the favourable tax regime, it must satisfy certain conditions of the IP box regime. According to the regime, 80% of “qualifying profit” generated from qualifying IP rights using the “nexus” approach will be considered as a deemed expense for corporation tax purposes.

According to the nexus approach, the level of the qualifying profits is positively correlated to the extent that the claimant of the IP regime undertakes its R&S activities and performance to develop the qualifying asset within the same company. The remaining 20% will be subject to the normal corporation tax rate of 12.5%. Thus, the qualifying profits will have an effective tax rate of as low as 2.5%.

Qualifying assets for the purposes of the IP regime include the following:

• patents;
• copyrighted software programs; and
• other intangible assets that are non-obvious, useful and novel.

Trade marks and copyrights are excluded for IP regime purposes.

Qualifying persons under the IP regime include Cyprus tax residents and Cyprus tax-resident permanent establishments (PEs).

There are no special rules regarding hard-to-value intangibles.

There are no special rules that apply to cost sharing/cost contribution arrangements.

Cyprus does not permit a taxpayer to make affirmative TP adjustments after filing tax returns unless a revised tax return is also submitted.

Cyprus has signed over 60 double tax treaties and tax information exchange agreements. The Cyprus tax authorities may share information with other jurisdictions; however, fishing expeditions are not accepted.

Cyprus has incorporated into its new TP regulations the opportunity for advance pricing agreements (APAs) to determine, in advance of controlled transactions, an appropriate set of criteria for the selection of pricing over a fixed period of time.

These criteria include:

• the method that is used or will be used;
• the comparable data and the relevant adjustments that might be needed;
• critical assumptions as to the functional profile and the market conditions; and
• any other matter that may relate to the pricing of the transactions with related parties.

Where the APA includes a request for consultation with the tax authorities of other states with which Cyprus has a double tax treaty in place (bilateral or multilateral APA), the taxpayer must submit this request with all supporting documents to the foreign tax authorities as well. In this case, the Commissioner of Taxation may hold consultations with the foreign tax authorities using the mutual agreement procedures (MAPs) provided in the double tax treaty concluded between the contracting states.

The formal exchange of views between the competent tax authorities takes place in the form of an exchange of position documents, which shall be made available to the applicant in accordance with the provisions that restrict and prohibit the use of information contained in an international agreement to which the Republic of Cyprus is a party and in the provisions of EU law.

When an APA is agreed, the prices of the intra-group transactions will be considered at arm’s length provided that they follow the APA’s details on pricing. During the tax review, the authorities will only ensure that what is agreed in the APA has been followed when pricing the transactions, and that the assumptions, circumstances and terms on which the APA is based are still applicable.

The documentation relating to the APA must be maintained by the company for the period where it is obliged to maintain books and records for each tax year that the APA relates to.

The APA may be revised during the period to which it applies, where the taxpayer so requests or after a request by the Commissioner of Taxation if:

• the critical assumptions on which the APA is based are proven to be inadequate;
• there is a substantial change in the critical assumptions or conditions that makes it impossible to comply with the provisions of the APA; or
• the MAP of the applicable treaty for the avoidance of double taxation or the EU Convention on the elimination of double taxation (90/436/EEC) is exercised in the case of correction of the profits of related companies for the transactions of the same taxpayer.

The revised APA will be applicable from the date of issue of the revised version until the end of the period of the APA that was initially agreed.

The APA may be recalled by the Commissioner of Taxation during the period in which it is active if:

• it is found that the facts and critical assumptions on which the APA is based are inadequate, due to false interpretation or defects for which the taxpayer is responsible; or
• it is found that the taxpayer has not complied with substantive conditions or obligations as set out in the APA.

Where the APA is recalled, it is considered as never having been issued in the first place.

The APA may be cancelled by the Commissioner of Taxation during the period in which it applies if:

• it is found that there has been a substantial change of the critical assumptions or conditions on which the APA was based;
• it is found that the taxpayer has not complied with substantive conditions or obligations as set out in the APA; or
• there is a substantial change in the tax provisions which substantially affects the APA.

The Commissioner of Taxation is not allowed to cancel the APA if it is possible to revise it (see above). However, where the APA has been cancelled, its validity ceases from the date indicated in the decision-of-cancellation document.

The Cyprus tax authorities have ten months to reach a decision on an APA, from the day of application. However, the Commissioner of Taxation can extend this period to 24 months. 

Since APA provisions were recently introduced in 2022, there is not yet practice regarding co-ordination between the APA process and MAPs.

There are no limits on which taxpayers or transactions are eligible for an APA.

The law and current guidance do not provide a period during which a taxpayer must file an APA application.

Relevant guidance regarding the fee for a taxpayer seeking an APA is expected to be issued by the tax authorities.

The period of validity of an APA cannot exceed four years.

An APA is not applicable to a tax year that has lapsed before the time of submission of the APA.       

Failure to provide a local file or master file within 60 days upon request from the Cyprus tax authorities is penalised as follows:

• EUR5,000 if submitted from 61 to 90 days after the request date;
• EUR10,000 if submitted from 91 days to 120 days after the request date; and
• EUR20,000 if submitted more than 120 days after the request date.

The penalty for failure to submit the SIT is EUR500.

The documentation file must consist of the master file and the Cyprus local file, and should be accompanied with the summary table of transactions. A master file must be prepared when the consolidated revenues of the group exceed EUR750 million. Further, a country-by-country report must be submitted for groups with revenue exceeding EUR750 million.

Although Cyprus is not a member of the OECD, in practice the Cyprus tax authorities refer to OECD materials for guidance.

Cyprus TP rules do not depart from the arm’s length principle.

Cyprus is, to a great extent, in compliance with the minimum requirements of the OECD’s Base Erosion and Profit Shifting (BEPS) project. In particular, the new TP legislation has been introduced with the aim of complying with Action Points 8–10 “Aligning transfer pricing outcomes with value creation” of the BEPS initiative.

There is no clear guidance regarding Cyprus’ perspective on the OECD’s BEPS 2.0 initiatives.

There are no provisions in the legislation for one entity to bear the risk of another entity’s operations by guaranteeing the other entity a return.

The UN Practical Manual on Transfer Pricing does not have any impact on TP practice or enforcement in Cyprus.

As per Circular 6/2023, published by the Cyprus tax authorities on 6 July 2023, entities entering into cross-border transactions can use the safe harbour rules, which are only applicable for entities not exceeding (or that should not be exceeding) the total aggregate amount of EUR5 million of related party transactions in the category of financing and the aggregate amount of EUR1 million of related party transactions in the remaining categories.

The safe harbour rules apply to the following types of transactions.

Types of Transactions

Provision of financing in the form of loans or cash advances to related parties

These are funded out of financial means, such as:

• bonds;
• loans from related parties;
• interest-free loans from the shareholders;
• cash advances; and
• bank loans.

The applicable safe harbour will be 2.5% after the deduction of allowable expenses. The minimum return of 2.5% will be applicable on the average balance of loan receivable for the relevant tax year, including the interest accrued but not paid.

Provision of financing in the form of loans or cash advances to related parties

These are funded out of own capital (such as issued share capital and share premium, non-refundable capital contributions, and retained earnings).

The applicable safe harbour will be the ten-year government bond of the borrower’s country plus 3.5%. The minimum return will be applicable on the average balance of loan receivable for the relevant tax year, including the interest accrued but not paid.

Receiving financing in the form of loans, bonds or cash advances from related parties, that carry an interest rate, to the extent that the funds borrowed are used in the business

The applicable safe harbour shall not exceed the ten-year government bond for Cyprus plus 1.5%. The minimum return will be applicable on the average balance of loan payable for the relevant tax year, including the interest accrued but not paid.

Conducting of low value-adding services

For the purposes of this Circular, low value-adding services are defined as services that:

• are of a supportive nature;
• are not part of the core activities of the group; and
• do not involve unique and valuable intangibles or a significant risk for the service provider.

The applicable safe harbour should be a minimum 5% mark-up on the relevant costs. If the entity under examination is the recipient of low value-adding services, 5% shall be the maximum applicable mark-up.

The use of safe harbour rules on the above-mentioned types of transaction must be supported by an appropriate minimum documentation. Such documentation will include a short description of functional analysis and characterisation of the entity, based on the functional analysis performed. For financing-type transactions (see above), the documentation must also include:

• analytical descriptions of the loans;
• the criteria met for the use of safe harbour; and
• the relevant numerical analyses that led to the taxable income.

For the low value-adding services, the minimum documentation must consist of:

• descriptions of the low value-adding services;
• justification of the reasons the services considered eligible for the safe harbour; and
• the relevant analyses and calculations.

The use of safe harbour should be declared in the relevant section of the taxpayer’s income tax return. If reliable internal comparables are available, the taxpayer is not permitted to use the safe harbour rules.

The simplified TP documentation must be made available within 60 days upon the CTA’s request, by the taxpayer or a person authorised to act as a representative of the taxpayer.

The provisions of unilateral safe harbour rules described above in cross-border transactions will be reportable under the DAC6 legislation in Cyprus, under Hallmark E.1.

Cyprus does not have specific rules governing savings that arise from operating in Cyprus.

Cyprus does not have any notable unique rules or practices applicable in the TP context.

Cyprus does not require co-ordination between TP and customs valuation.

The relevant legislation in Cyprus was introduced in 2022; therefore, there is no (or, at most, a limited) TP controversy process. A taxpayer can challenge the results of a TP audit through the tax tribunal. The taxpayer is not obliged to pay the tax before applying to court.

Cyprus TP legislation was introduced in 2022; therefore, judicial precedent on TP in Cyprus does not yet exist. As such, UK, EU or other common law jurisdiction judicial precedent may be used.

As TP legislation was only recently introduced in 2022, there are no court rulings yet.

Cyprus does not restrict outbound payments relating to uncontrolled transactions provided they are incurred wholly and exclusively for the production of taxable income.

Cyprus does not restrict outbound payments relating to controlled transactions, provided such payments are incurred wholly and exclusively for the production of taxable income and are at arm’s length.

Cyprus does not have rules regarding the effects of other countries’ legal restrictions.

Cyprus does not publish information on APAs or TP audit outcomes. As the concept is rather new, little information is available to publish.

There is no guidance for prohibiting the use of “secret comparables”. Also, since the relevant legislation is fairly new, at this point the tax authorities do not refer to “secret comparables”.