Transfer Pricing Regulations in Cyprus

Transfer Pricing Regulations in Cyprus

In Cyprus, transfer pricing regulations are regulated by Cyprus Income Tax Law (Law No. 118(I)/2002) (hereinafter: “ITL“) as amended in 2022, which includes the OECD guidelines. In addition, Circulars issued by the Cyprus Tax Department offer specific guidance on the application of transfer pricing regulations.

Arm’s Length Principle

Section 33 of the ITL states that the transactions between entities associated by this section should be performed by the companies in principle at arm’s-length. Hence, all transactions between related companies, either in Cyprus or abroad, are covered by the arm’s-length principle of pricing. In other words, the prices and terms should be as such that would have been agreed upon between independent enterprises. If the profits of an enterprise are reduced as a result of arrangements that do not conform to this principle, the tax authority may make an adjustment of the profits for tax purposes.

Related Party Definition

Article 33(3) of the ITL resents a 25% ownership rule to determine if legal entities or individuals are related for transfer pricing purposes. This means two parties will be considered related if:

  • One party owns 25% or more of the shares or voting rights in another entity, either directly or indirectly, or has at least 25% of the income rights from that company.
  • An individual holds at least 25% of the shares or voting rights in two different companies, either directly or indirectly.

In addition, there are a few more ways for parties to be considered related:

  • A person is considered related to another if they are the spouse, a relative, the spouse of a relative, or a relative of the spouse of that person.
  • A person is related to anyone they have a partnership with, as well as that partner’s spouse or relatives.

 

Transfer Pricing Methods

The methods that can be used to determine the arm’s length price in Cyprus are determined in compliance with the OECD guidelines, as follows:

  • Comparable uncontrolled price method
  • Resale price method
  • Cost plus method
  • Transactional net margin method
  • Profit split method

Cyprus does not provide for a hierarchy between the five OECD-approved methods, but instead, it emphasizes the need to follow the arm’s-length standard. All supporting documentation must align with this standard. However, the Cyprus tax authorities issued a Circular in 2023, which recommends using the comparable uncontrolled price method as the preferred approach for establishing arm’s-length prices in “back-to-back” financing transactions, in line with OECD guidelines.

Comparability Analysis

An important part of the transfer pricing compliance is the comparability analysis. Cyprus’s TP comparability analysis emphasizes the use of domestic comparables; however, external databases like AMADEUS and Orbis are often used in the European Union.

Documentation Requirements

As of January 1, 2022, Cyprus has implemented local file and master file requirements following Action 13 of the OECD/G20 BEPS Project. Under these provisions, Cyprus-associated parties—Cyprus resident entities or permanent establishments of non-residents are required to prepare the following:

  • Local File: Required if controlled transactions exceed 750,000 euros in total for the reporting year. The local file must substantiate arm’s length pricing and provide the economic basis of transactions involving Cyprus-associated parties.
  • Master File: Required for entities that are the main parent or surrogate parent of a multinational enterprise (MNE) group, especially for Country-by-Country (CbC) reporting.

 

The local and master files must be prepared by the deadline for submitting the corporate tax return. Additionally, they should be accessible to the Commissioner of Income Taxes within 60 days upon request.

In a February 1, 2024, announcement, the Ministry of Finance proposed amending the single 750,000-euro threshold for the local file. The proposed thresholds, pending consultation and legislative changes, are:

  • 5 million euros for financial transactions.
  • 1 million euros for other transactions.

 

Furthermore, on July 6, 2023, the Cyprus Tax Department issued Circular 6/2023, titled “Simplification Measures for Persons Exempt from Maintaining a Cyprus Local File.” This Circular offers guidance on basic transfer pricing documentation that is necessary to prove that transactions with associated parties are at arm’s length. It also offers optional simplification measures for certain controlled transactions.

As of January 2016, multinational enterprises with annual revenues of 750 million euros or more are required to submit a Country-by-Country report. This report must be filed by the ultimate or surrogate parent entity residing in Cyprus within one year after the end of the fiscal year if the parent company is based in a jurisdiction that has a valid international agreement with Cyprus but lacks a competent authority agreement, a local entity may still be obligated to file the report.

The CbC report must comply with Action 13 of the OECD/G20 BEPS Project and the EU Directive 2016/881/EU. It should include key details such as revenue, profits or losses before tax, taxes paid and owed, capital, accumulated earnings, number of employees, and tangible assets for each jurisdiction. Additionally, it needs to identify each group entity, its location, and its main activities. Cyprus is part of a Multilateral Competent Authority Agreement for the automatic exchange of CbC reports, promoting transparency and helping to prevent tax base erosion.

Cyprus Pricing Agreements (APA) and Mutual Agreement Program (MAP)

Since 2022, Cyprus has implemented a formal process allowing associated parties to request advance pricing agreements (hereinafter: “APAs“) for controlled transactions. These agreements can last up to four years. Under Section 33 of the Cyprus Income Tax Law, APAs are categorized into three distinct types:

(i) Unilateral APAs, which are formed exclusively between the taxpayer in Cyprus and the Cyprus Tax Department, that only focus on domestic tax compliance; (ii) Bilateral APAs involve both the Cyprus taxpayer and their related foreign counterpart, as well as collaboration between the Cyprus Tax Department and the tax authority of the counterpart’s jurisdiction, ensuring mutual agreement on transfer pricing methods; and lastly (iii) Multilateral APAs, which are the most complex, engaging the Cyprus taxpayer, multiple foreign counterparties, the Cyprus Tax Department, and several international tax authorities to establish consistent transfer pricing agreements across multiple jurisdictions.

The Tax Commissioner, who is the head of the Tax Department in Cyprus, is responsible for reviewing the APA and will inform the taxpayer of the decision within ten months, which can be extended to 24 months if necessary. APAs may be revised or revoked if the initial assumptions prove inaccurate or if the taxpayer fails to comply with obligations. Successful APA processes may inform future decisions.

In addition, Cyprus has a wide network of tax treaties and uses the mutual agreement procedure (MAP) to resolve double taxation issues. This is based on its bilateral treaties, which mostly follow the OECD Model Convention and the EU Arbitration Convention where applicable. The MAP can also be used in transfer pricing cases to make corresponding adjustments and avoid double taxation.

Approach to Transfer Pricing Audits

Transfer pricing audits in Cyprus follow rules introduced in June 2022, which came into effect on January 1, 2022, and are based on OECD guidelines. These regulations require Cyprus-based businesses and foreign branches operating in Cyprus to ensure their transactions with related parties follow the arm’s length principle. To comply, taxpayers must keep detailed records, including a Summary Information Table (SIT) submitted yearly with their tax returns and a Transfer Pricing Documentation File.

Penalties

According to section 33 of the ITL, the master file and local file must be ready by the corporate tax return deadline and provided to the Commissioner of Income Taxes within 60 days if requested. In case of delayed submissions, the following penalties will be applied:

  • 5,000 euros if submitted within 90 days after the request.
  • 10,000 euros if submitted within 120 days.
  • 20,000 euros if submitted more than 120 days after the request or not at all.

 

In addition, the legal amendments in 2022 stipulate that all Cyprus-associated parties must submit a summary table of controlled transactions with their corporate tax return. Non-compliance with this requirement incurs a penalty of 500 euros. Moreover, if the MNE fails to submit the CbC reporting, it might receive a fine of up to 10,000 euros. It is important to note that other penalties may apply.

Taxation at a Glance

The official name of Cyprus’s tax authority is the  Tax Department. The table below provides a summary of the main taxation rates related to businesses:

Tax Type

Tax Rate

Corporate Tax

12.5%

VAT

19%

Withholding tax on dividends to non-residents

17%

Withholding tax on interest to non-residents

17%

Withholding tax on royalties to non-residents

10%

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