CYPRUS: Transfer pricing and documentation requirements
Updated: Aug 20
The Cyprus House of Representatives amended the Income Tax Law and the Assessment and Collection of Taxes Law with regard to transfer pricing on June 30, 2022, and approved those changes (collectively TP legislation).
According to the Organization for Economic Co-operation and Development's recommendations on Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, the aforementioned legislative developments seek to enact transfer pricing regulations and documentation requirements (OECD TP Guidelines).
When the laws are published in the Republic's Official Gazette, which is anticipated to happen in the coming weeks, they become enforceable. The TP law will go into effect on January 1, 2022.
The important modifications and general transfer pricing guidelines that will be in effect as of January 1, 2022, are outlined in this Alert.
Amendments to the Income Tax Law (ITL) and issuance of the Regulations Section 33 of the ITL was changed as follows:
· Introduction of a 25% threshold in defining the relationship or connection of a Cypriot company with another person for Cypriot transfer pricing purposes
· Removal of the reference to ”control” in relation to a partnership
· Stipulation that the arm’s-length principle wil be interpreted in accordance with the OECD TP Guidelines as amended from time-to-time
· Introduction of the provisions relating to the application of the OECD TP Guidelines, the content of the TP Documentation File (Local and Master Files) and the Summary Information Table (SIT) and the documentation methods for intercompany transactions
· Introduction of the concept of Advance Pricing Agreements (APAs)
Additionally, the Council of Ministers will issue transfer pricing guidelines for APAs and TP documentation (the Regulations). The requirements for TP documentation and the process for APAs will be covered in more detail in the Regulations.
The Regulations and the corresponding legislative amendments will take effect on January 1, 2022. The following is a summary of the main clauses.
introduction of a 25% threshold for connections or relationships
In order to define the relationship or connection between a Cypriot company and another person for transfer pricing purposes, Section 33 of the ITL has been amended to include, among other things, a percentage.
Following the aforementioned changes, a company is associated with another company in the event that:
· The same person has, directly or indirectly, at least 25% of the voting rights or of the share capital or is entitled to at least 25% share of the income of both companies.
· The same person and persons connected with that person holds, directly or indirectly, at least 25% of the voting rights or of the share capital or are entitled to at least 25% share of the income of both companies.
· A group of two or more persons holds, directly or indirectly, at least 25% of the voting rights or of the share capital or are entitled to at least 25% share of the income of each company and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person with whom that person is connected.
A company is also considered to be connected to another person if they jointly hold, directly or indirectly, at least 25% of the voting rights, 25% of the share capital, or 25% of the company's income. This also applies if they are connected to others who collectively hold, directly or indirectly, at least 25% of the voting rights, 25% of the share capital, or 25% of the company's income.
Last but not least, any two or more individuals acting jointly to obtain, directly or indirectly, at least 25% of the voting rights or the share capital or are entitled to at least 25% share of the company's income shall be treated in relation to that company as connected with one another and with any individual acting on the direction of any of them to obtain, directly or indirectly, at least 25% of the voting rights or the share capital or is entitled to at least 25% share of the company's income.
Requirements for TP documentation
According to the new ITL provisions, connected persons who are tax residents in Cyprus or permanent establishments of non-tax residents in Cyprus (Liable Taxpayers) are required to create TP documentation files and SITs for transactions falling under Section 33 of the ITL (such as intercompany transactions), subject to the terms outlined below.
The TP documentation file must include the following:
· Master file
· Cypriot local file (local file)
The master file of a multinational enterprise contains standardized information that is pertinent to each group member in accordance with OECD TP Guidelines (MNE). To help tax administrations assess whether there is a significant transfer pricing risk, the Master File should more specifically give an overview of the MNE group's operations, including the nature of its global business operations, its overall transfer pricing policies, and its global allocation of income and economic activity. The master file's overall goal is to give a broad overview of the MNE group's transfer pricing practices in the context of the world's economic, legal, financial, and tax systems.
In accordance with the Administrative Cooperation in the field of Taxation Law, Liable Taxpayers who serve as the Ultimate Parent Entity (UPE) or Surrogate Parent Entity (SPE) for Country-by-Country Reporting purposes are subject to the master file obligation.
In more detail, if the following two circumstances hold true for Liable Taxpayers:
· The taxpayer is a member of an MNE Group with a Country-by-Country Reporting obligation (for example, with consolidated revenue above €750 million).
· Either the surrogate parent entity or the ultimate parent entity (UPE) is the taxpayer (SPE).
By the deadline for filing an income tax return for the relevant tax year, the master file must be ready (e.g., currently 15 months after calendar year-end).
The master file must be made available by the liable tax payer at any time following the deadline for preparation and delivered to the tax department within 60 days of the department's request.
Every year, the master file must be updated, and any material modifications to the market environment that could affect the information and data in the master file must be specifically mentioned.
The local file refers specifically to material transactions of the local taxpayer in accordance with OECD TP Guidelines. The local file assists in achieving the goal of ensuring that the taxpayer has complied with the arm's-length principle for its significant transfer pricing positions, in contrast to the master file, which offers the high-level overview mentioned above. The information pertinent to the transfer pricing analysis of transactions involving connected parties is the main focus of the local file (as defined in Section 33 of the ITL). These details would include the choice and use of the most suitable transfer pricing method, pertinent financial data regarding those particular transactions, and a comparability analysis.
For Liable Taxpayers, the local File obligation kicks in if their combined transactions with connected persons total more than €750,000 per category of transaction per tax year, or should have exceeded that amount based on the arm's-length principle.
Any individual with a practicing certificate from ICPAC or another recognized institute of certified accountants in Cyprus should be required to sign off on the local file as part of the quality assurance review process.
The local file must be ready by the deadline for filing an income tax return for the relevant tax year (e.g., currently 15 months after calendar year-end).
The local file must be made available by the liable tax payer at any time following the deadline for preparation and delivered to the tax department within 60 days of a request.
The local file must be updated yearly, and specific mention must be made of any material modifications to market circumstances that might have an impact on the data and information contained therein.
Summary Information Table
The SIT is a separate form (TP return) that should include high-level details about the taxpayer's yearly intercompany transactions, such as information about the counterparties, the type of intercompany transactions engaged in, and the amount per category of transactions.
All Liable Taxpayers are subject to the SIT reporting requirement on an annual basis.
Along with the income tax return, the SIT must be submitted to the tax department.
An APA chooses a suitable set of standards (such as a method, comparables and the proper adjustments thereto, and critical assumptions about future events) to be used for a predetermined amount of time in relation to particular controlled transactions that were completed in accordance with the arm's-length principle. The ability to obtain some degree of certainty regarding how the law will be applied in a specific set of circumstances is the main advantage an APA offers to a taxpayer.
APAs are available to the Liable Taxpayers and are available in a variety of forms. The Regulations' general provisions permit unilateral, bilateral, or multilateral APAs.
A unilateral APA involves only the Liable Taxpayer and the Cyprus Tax Department.
A bilateral APA involves the Liable Taxpayer and its non-Cypriot connected counterparty as well as the Cyprus Tax Department and the foreign tax authority.
A multilateral APA involves the Liable Taxpayer and its non-Cypriot connected counterparties as well as the Cyprus Tax Department and the foreign tax authorities.
Timeframe and validity period
The Tax Commissioner must accept or reject an APA request within 10 months of it being submitted to the Tax Department. The Tax Commissioner may extend the deadline by up to 24 months after receiving notice from the applicant.
The APA is valid for a maximum of four years.
The Regulations include mechanisms for amending, canceling, or revoking an APA under certain circumstances, such as material changes to the critical assumptions listed in the APA, the Liable Taxpayer's failure to adhere to the APA's terms and conditions, changes in tax law, or provisions of double tax treaties that have an impact on the APA.
Amendments on the Collection and Assessment Law
Penalties for missing the deadlines for submitting the TP documentation file and the SIT have been added thanks to the Collection and Assessment Law.
More specifically, the fine is €500 if the SIT is not submitted by the deadline specified in the Regulations (such as the due date for filing the income tax return).
Furthermore, in accordance with the Regulations, the TP documentation file must be delivered to the Tax Department within 60 days of receiving a request. The following penalties apply if the TP documentation file is submitted after the 60th day:
The fine is €5,000 if submitted between 61 and 90 days.
If it is submitted between days 91 and 120, the penalty is €10,000.
If it is not submitted or is submitted after the 120th day, the penalty is €20,000.
*DISCLAIMER: This article and its publication are intended to provide a brief introduction and act as a general guide. This is provided for information purposes only and cannot be utilized as a substitute for professional advice. This document does not represent a legal opinion and one must not rely on it without receiving independent advice based on the particular facts of its own case. No responsibility is accepted by the author or the publishers for any loss suffered from acting or refraining from acting based on the contents of this publication.
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