Transfer pricing is a very important and current topic in tax planning – effective as from January 2022 in Cyprus, with some amendments that have just been announced by the Tax Department.
In brief, the concept of transfer pricing is directly connected to the application of the so called “arm’s length principle”. The term means that transactions conducted between associated persons should follow the arm’s length principle. The goal of Transfer Pricing is to regulate the pricing of transactions between related persons, ensuring that the same market conditions that apply for transactions between unrelated companies (carried out at arm’s length) – apply to transactions undertaken between companies that are related to each other.
Application of transfer pricing in Cyprus
Transfer pricing rules and documentation requirements are applicable in Cyprus as from January 2022 – all in line with the OECD TP Guidelines. The new rules require domestic and cross-border intra-group transactions to be documented for Cypriot TP purposes.
The Controlled Transaction Prices Documentation File consists, as the case may be, of the :
- Cyprus Controlled Transaction Price Documentation File (“Local File”);
- Master File for Documenting Prices of Controlled Transactions (“Master File“).
Both files should be prepared by the Income Tax Return submission deadline for the respective tax year. After this deadline the Files must be submitted by the taxpayer to the tax authorities within 60 days upon request.
The Local File covers transactions between related parties, including relevant financial information, description of the controlled transactions and the reasoning behind the application of the appropriate TP method.
In addition to the local file, all Cyprus companies that engage in controlled transactions must prepare and submit the Summary Information Table (“SIT”), listing all controlled transactions (e.g., Goods, Services, IP related. Financing, Others) that the company concluded with its related parties, irrespective of the value of each transaction. The Table shall be submitted to the tax authorities on an annual basis together with the Income Tax Return.
New transfer pricing threshold
On 1 February 2024, the Cyprus Tax Department announced the increase of the threshold for the preparation of a Cyprus Local File for the tax year 2022 onwards, as follows:
- €5.000.000 for related party transactions in the category of financing transactions; and
- €1.000.000 for the rest categories of related party transactions, i.e., goods, services, intellectual property and other (before the threshold was €750,000 for any category).
Simplified TP measures
Simplification measures relate to simplified transfer pricing documentation requirements – targeting at reducing compliance costs in situations that are likely to present a low transfer pricing risk.
During 2023, the Tax Authorities issued a tax circular (6/2023) which introduced simplification measures for taxpayers that are exempted from the obligation of preparing a TP Cyprus Local file, allowing the application of safe harbor rates.
The Circular provides guidance to tax residents in Cyprus, or permanent establishments in Cyprus of non-tax resident persons who are engaged in transactions with associated persons, but the transactions cumulatively do not exceed the above-mentioned revised thresholds (per category of transaction in the tax year).
The simplification measures also apply as from 1 January 2022. Therefore, in practice, even if transactions are between related parties, but they do not exceed the threshold amount – in aggregate per category of transaction per tax year – they are exempted from the obligation of preparing a TP Local file.
General provisions for the application of the simplification measures
The use of the simplification measure should be accompanied by the minimum documentation requirements as detailed for each category (provision of financing to connected persons funded by debt instruments /by equity, receipt of financing from connected persons used for business purposes, low value-adding services). Such documentation must be provided to the tax authorities within 60 days upon request.
If the accounting profit from controlled transactions is higher than the arm’s-length profit determined based on a transfer pricing study or via the use of the simplification measures, the Tax Department will not proceed to any downward adjustment of taxable income.
The taxpayer must disclose use of one or more simplification measures by including this information in the taxpayer’s Income Tax Return/Summary Information Table form – by the Income Tax Return submission deadline.
The simplification measures can never be used for a controlled transaction that falls within a category for which the taxpayer is obligated to maintain a Cyprus Local File (so when the total of controlled transactions in the specific category exceeds the threshold the specific tax year).
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For further enquiries, please contact us by email on [email protected] or call our office in Cyprus on +357 222 58 777.
