All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Cyprus: Long-awaited transfer pricing guidelines on intra-group financing released

intl-updates-small.jpg
nicolaou.jpg
sagianni.jpg

Maria Nicolaou

Anastasia Sagianni

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 entities.

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 transaction; and

  • 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 Cyprus.

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 (maria.nicolaou@eurofast.eu) and Anastasia Sagianni (anastasia.sagianni@eurofast.eu)

Eurofast Taxand Cyprus

Tel: +357 22699222

Website: www.eurofast.eu

More from across our site

The fast-food company’s tax settlement with French authorities strengthens the need for businesses to review their TP arrangements and documentation.
The full ALP model will be adopted through a new TP regime, which is set to boost the country’s investments and tax certainty.
Tax professionals have called on the UK government to reconsider its online sales tax as it would affect the economy at the worst time.
Tax professionals have called on companies to act urgently to meet e-invoicing compliance targets as the EU plans to ramp up digitisation.
In the wake of India’s ambitious 25-year plan for economic growth, ITR has partnered with leading tax commentators to discuss what the future will look like for India and for the rest of the world.
But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
Multinationals are asking world leaders to put a scale on carbon pricing to tackle climate change at the 48th G7 summit in Germany, from June 26 to 28.
The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
This week the Biden administration has run into opposition over a proposal for a federal gas tax holiday, while the European Parliament has approved a plan for an EU carbon border mechanism.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree