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The Cyprus Income Tax Law, as recently amended, introduces Transfer Pricing (“TP”) studies documentation compliance requirements, in accordance with the OECD Guidelines.

Summary of key amendments and key TP rules:

 

1. Defining the connection between related parties

A threshold of 25% has been introduced, and therefore:

• Companies are considered related if one person or group(s) of persons directly or indirectly hold the voting rights or share capital of both companies or have right to a minimum of 25% of both companies’ income.
• Companies are considered related to a person that directly or indirectly holds 25% of the voting rights or share capital of the company or has a right to a minimum of 25% of its income.
• Two or more persons are considered related if they act together (or receive instructions) to directly or indirectly hold 25% of the voting rights or share capital of a company or have a right to a minimum of 25% of its profit.

 

2. TP Documentation Requirements

TP Documentation compliance requirements that relate to Cyprus tax residents and/or permanent establishments (“PEs”) located in Cyprus of non-Cyprus Tax resident entities, engaging in local or cross-border transactions, include transactions between (a) Cyprus tax resident entities; (b) PEs of Cyprus non-tax resident entities, their head offices and related entities abroad; and Cyprus tax resident entities and foreign PEs.

Transfer Pricing Documentation should be prepared on an annual basis, prior to the income tax return submission for the relevant tax year, and it must include the Master File, the Local File and the Summary Information Table.

Exemptions apply as follows:

• For companies that the value of related party transactions is below EUR 750 000 per year, per type of activity; and
• Only Cyprus tax resident entities that are the parent of the MNE group are obliged to prepare and maintain a Master File.

The Master File must be prepared by the income tax return deadline, and administrative penalties apply in case of late submission and further to a notification sent by the Cyprus tax department.

 

3. Advanced Pricing Agreement (“APA”) Procedure

Cyprus tax resident persons or PE can file to the Cyprus tax authorities an APA request relating to current or future local or cross-border transactions. Applications will be reviewed by the tax department within 10 months and with an extension possibility of 2 years. The APA decision is valid for 4 consecutive years; however, it cannot be applicable for any tax years prior to the submission of the APA request.

The APA application may involve foreign tax authorities with which Cyprus has entered into a double tax treaty (DTT); and the corresponding request should also be filed with the authorities of the other jurisdiction involved.

An approved APA is considered binding; however, it may be revised at the request of the taxpayer or at the discretion of the tax authorities only if (a) the conditions and criteria on which the APA decision was taken changed substantially and therefore, the APA cannot be applied; or (b) the critical assumptions on which it was based have been proven incorrect; or (c) if there are arbitration procedures under an effective DTT or under the EU Arbitration Convention.