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Interpretative Circular 3

Updated: Aug 20

FAQs on intra-group back-to-back financing activities issued by the Cyprus Tax Department

The Cyprus Tax Department (CTD) added a new Transfer Pricing "Frequently Asked Questions (FAQs)" section to its website on January 24, 2022. The FAQs are about Interpretative Circular 3, which was issued in 2017 and covers back-to-back intra-group financing activities. The Circular refers to the application of TP methodology to such activities in accordance with the OECD's arm's length principle. It should be noted that the Circular, applies to intra-group financing activities in which a Cypriot tax resident company (or a Cypriot permanent establishment of a non-resident company) grants loans or cash advances to related parties, which are financed by financial means and instruments such as debentures, private loans, cash advances, or bank loans. The Circular outlines the steps that must be taken to prepare a Transfer Pricing Analysis for such activities. It also includes a simplification measure (effectively a safe harbour remuneration of 2% after-tax on assets) for businesses that do not plan to conduct a TP Study.


When the relevant criteria are met and the company pursues a purely intermediary activity within the financing arrangements, such as borrowing from related parties and on-lending to related parties, this simplification measure can be chosen.


It should be noted that choosing the simplification measure is contingent on information exchange (included in DAC6 reporting following the subsequent introduction of the relevant DAC6 provisions in Cyprus).


The following are some of the most important points from the CTD website's FAQs:

  • The answers to the FAQs apply to all transactions that fall within the scope of the Circular and relate to loan agreements signed as of the date of the FAQs' release (January 24, 2022), as well as loan agreements signed prior to that date but not examined by the CTD by that date.

  • Transfer Pricing documentation should not be filed with the CTD as part of the annual tax filing process; instead, it should be submitted to the CTD only when requested.

  • The TP expert who prepares the TP Study must have sufficient practical experience, competence, and technical knowledge to prepare a TP study in accordance with the OECD TP Guidelines and Cyprus Tax Legislation. A TP expert is qualified if he or she can show that he or she has sufficient technical expertise, training, and knowledge in TP matters.

  • If a company chooses the simplification measure (2% margin after tax) because it is functionally reduced as a purely intermediary financing entity, it should only prepare a functional analysis

  • If the company does not have a TP study in place (and does not fall under the simplification measure), the CTD may assess the company's taxable profits based on the available information and at its discretion.

  • When an intragroup loan is initiated, a TP study should be prepared and updated when:

i. New loans are provided or received by the company,

ii. significant terms of existing loans change or are amended,

iii. the company's functional profile changes

iv. market and economic conditions change significantly (if applicable).


The above list is indicative and not exhaustive.

  • "Specialised personnel," as defined in paragraph 19 of the Circular, should have sufficient knowledge, competence, and experience to make decisions and manage the risks of a controlled transaction under consideration. In order to understand what "control over risk" means, the relevant parts of the OECD TP Guidelines are referred to.

It is clarified that a company is not required to hire specialized personnel if its board of directors has sufficient knowledge, competence, and experience to perform decision-making functions and control the risks associated with the transactions under consideration.

  • Contributions from physical persons who are shareholders are covered by the Circular, whether or not they are interest bearing, and are thus considered to be funding back-to-back financing arrangements. Contributions that are considered equity, on the other hand, do not fall within the definition of financial means and instruments described in paragraph 2 of the Circular, and thus are not covered by the Circular.

  • In cases where the simplification measure is used, a minimum margin of 2% after tax is applied to the value of the company's assets, according to paragraph 25 of the Circular.

Only assets relating to intragroup back-to-back financing transactions (i.e. loan receivables) are interpreted as "company's assets" Furthermore, the value of loan receivables denotes the principal amount.


Under certain facts and circumstances, accrued interest could be included in the value of a company's assets (for example, if a loan agreement includes provisions for capitalisation of interest or if accrued interest could be considered additional financing based on the parties' actual conduct).

  • A company that engages in back-to-back intra-group financing activities while also engaging in other activities is still subject to the Circular's provisions in relation to its back-to-back financing transactions.

  • Both cross-border and domestic transactions between related companies are covered by the Circular.


*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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