Cyprus: Circular in Cyprus sheds light on transfer pricing adjustments
A circular issued by the Cypriot finance and tax authorities on November 24 2016 clarifies that they will also allow downwards or compensating transfer pricing (TP) adjustments.
Circular 2016/15, issued by the Ministry of Finance, clarifies the application of Article 33 of the Income Tax Law. Article 33 – as amended in 2015 (L.187(I)/2015) – provides the definition of the arm's length principle for controlled transactions between associated enterprises. In particular, according to the above-mentioned provision, if a taxpayer is resident in Cyprus, or if there is a permanent establishment of a non-resident in Cyprus, then for any deviation from the arm's length price, downward adjustments are also possible. In other words, for intra-group transactions on terms that deviate from similar transactions between independent parties, the tax base may be adjusted in order to reflect an arm's length price.
According to paragraph 5 of Article 33, in cases where a taxpayer's tax base is increased because of TP adjustments, a notional expense for the other party in the transaction would be acceptable.
The circular clarifies that the implementation of Article 33 (5) may be initiated by the taxpayer. In cases of a documented TP adjustment, the tax authorities may accept the relevant adjustment and include not only notional revenue but also the corresponding notional expense for enterprises resident in Cyprus or for PEs of non-residents in Cyprus.
On the basis of TP documentation, taxpayers may request or propose a relevant adjustment that will better reflect the arms' length principle. As a result, in the event of underestimating the tax base caused by intra-group transactions, Cypriot enterprises may receive a compensating adjustment for the other party engaged in the said transaction.
Anastasia Sagianni (firstname.lastname@example.org)
Tel: +357 22 699 222