On 30th June 2022 the Cyprus Parliament approved the amendments of the Cyprus Income Tax Law and new Regulations, aiming to introduce transfer pricing (TP) rules and documentation requirements in accordance with recommendations of the Organisation for Economic Co-operation and Development (OECD) on Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TP Guidelines).
The legislative amendments of the Income Tax Law on TP matters, as well as the new Regulations on TP documentation obligations and the Advance Pricing Agreement (APA) procedure, will be effective as of 1st January 2022 and will affect the majority of both local and multinational groups and companies in Cyprus which engage in transactions with related parties.
Amendments to the Income Tax Law
Arm’s length principle, as per Article 33 of the Law, may be interpreted and applied in accordance with the OECD TP Guidelines.
Introduction of new TP documentation compliance obligations and a formal procedure for obtaining the APA.
Update of the definition of related parties and introduction of a minimum 25% relationship threshold relevant for companies:
- Two companies are considered as related if the same person (and its related persons) or group(s) of persons (under certain conditions) directly or indirectly: → hold 25% of the voting rights or share capital of both companies; or → have the right to at least 25% of both companies’ income;
- A company is also considered related to a person (and its related persons) that directly or indirectly: → hold 25% of its voting rights or share capital; or → have the right to at least 25% of its income;
- Two or more persons are considered related if they act together (or take directions) to directly or indirectly: → hold 25% of the voting rights or share capital; or → have the right to at least 25% of the profit of a company.
TP documentation obligations and APA procedure
Cyprus tax resident persons and permanent establishments of non-Cyprus tax resident persons situated in Cyprus engaging in domestic and/or cross-border Controlled Transactions are required to prepare annually the TP Documentation File (exemptions apply, as stated hereinafter), which will include:
- the Master File (where the ultimate parent is in Cyprus);
- the Cyprus Local File (with no requirement to maintain a file for companies of which the value of transactions with related parties is below €750,000 per annum per category i.e. sale/purchase of goods, provision/receipt of services, financing transactions, receipt/payment of IP licencing/royalties, others); and
- the Summary Information Table (submitted electronically together with the Income Tax Return for the relevant tax year, by all taxpayers that engage in Controlled Transactions on an annual basis, disclosing details regarding such transactions including the names and tax identification codes of the related counterparties, and the respective values per transaction category i.e. sale/purchase of goods, provision/receipt of services, financing transactions, receipt/payment of IP licences/royalties, others).
Cyprus Tax Department (CTD) will be issuing a relevant Notification to announce (amongst others) the required detailed contents of the Master File and Cyprus Local File.
TP Documentation File must be updated on an annual basis, with consideration of market fluctuations or other events on the information and analysis included therein, and must be submitted for Quality Review by the deadline of filing the Income Tax Return for the relevant tax year.
TP Documentation File must be retained in compliance with the general document retention obligations for tax purposes and submitted to the CTD upon request, e.g. for the purpose of tax audit, within 60 days from the notification of such request received from the CTD. Penalties for non-compliance will apply as follows:
- in case of late submission of the TP Documentation File following the notification of a request for submission by the CTD to the taxpayer, the following penalties will apply: → €5,000 if the TP Documentation File is filed after the 60th day and before the 91st day from the notification; → €10,000 if the TP Documentation File is filed after the 90th day and before the 121st day from the notification; → €20,000 if the TP Documentation File is filed after the 120th day from the notification;
- in case of non-submission of the TP Documentation File following the notification of a request for submission by the CTD, a penalty of €20,000 will apply;
- in case of non-submission of the Summary Table a penalty of €500 will apply.
Cyprus tax resident persons and non-Cyprus tax resident persons that have a permanent establishment situated in Cyprus may submit to the CTD an APA Request with respect to current or future domestic or cross border Controlled Transactions.
- APA request may cover various conditions and assumptions relevant for determining the arm’s length pricing of the Controlled Transactions for a specified period (including critical assumptions on the functional and risk profile of the parties involved; relevant market conditions; applicable TP method to be followed; identified uncontrolled comparable transactions and any necessary adjustments made to determine the arm’s length price range; any other specialized matter relating to the pricing of the Controlled Transactions).
- CTD may approve or reject the APA request upon examination.
- CTD should issue the APA decision within 10 months (and may notify extension of this deadline for up to 24 months) from the date of submission of the APA request by the taxpayer. The APA decision may be applicable for a maximum term of 4 years and cannot apply for any tax year prior to the tax year in which the request is submitted.
For more information on the transfer pricing updates in Cyprus and how this may affect your business, please contact us on [email protected]