As of July 1 2017, the tax treatment of intra-group
financing arrangements has been amended in Cyprus.
Intra-group financing transactions refers to finance
activities between related parties (as defined in section 33 of
the Income Tax Law), including permanent establishments (PE) in
Cyprus. Based on the Interpretative Circular issued by the
Cyprus tax department, intra-group financing arrangements must
be taxed from July 1 2017 onwards under the arm's-length
principles (transfer pricing rules).
For the purposes of the transactions under the scope of the
circular issued, it must be determined for each intra-group
transaction whether it complies with the arm's-length
principles. A comparability analysis must be performed in order
to determine whether the transaction between independent
entities is comparable to transactions between related
The comparability analysis mentioned above should consist of
the two following parts:
- Identification of the commercial financial
relationship between entities and determining the conditions
and economically relevant circumstances attached to those
relations in order to accurately delineate the controlled
- Comparison of the accurately delineated
conditions and economically relevant circumstances of the
controlled transaction with those of the comparable
transactions between independent entities.
It should be noted that the group financing company should
be controlling the risk if it has the decision-making power to
enter into a risk-bearing commercial relationship. In order to
justify the risk control and further validate that the
management and control are exercised in Cyprus, it is essential
that the group financing company has an actual presence in
In case of companies with a profile comparable to the
entities subject to Regulation (EU) No. 5/2013 of the European
Parliament and of the Council of June 26 2013 on prudential
requirements for credit institutions and investment firms and
amending Regulation (EU) No. 64/2012, a return on equity of 10%
after-tax can be observed in the market and be considered as
reflecting arm's-length remuneration for the financing and
treasure functions in question.
Simplified procedures exist, according to which the
transactions of financing companies pursuing a purely
intermediary activity are deemed to comply with the
arm's-length principle if the company under review receives a
minimum return of 2% after tax on assets. In order to benefit
from this simplification measure, the use of it should be
communicated to the tax department.
The above mentioned percentages are valid as of the date of
issuance of the circular and will be reviewed by the tax
department based on relevant market analysis and – if
required – will be changed accordingly.
Minimum requirements for the transfer pricing analysis exist
and are necessary in order for the analysis to be in compliance
with the principles of the new circular.
Finally, any tax rulings relating to the matters of the
circular which were issued prior to July 1 2017 will no longer
be considered valid.
The above changes will have an immediate impact on all
Cyprus financing companies with intra-group financing
transactions and it is imperative that such structures are
examined to ensure that their tax treatment is correct and
their tax risk exposure is mitigated.
Maria Nicolaou (firstname.lastname@example.org)
and Anastasia Sagianni (email@example.com)
Eurofast Taxand Cyprus
Tel: +357 22699222