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In addition to our earlier tax alert dated 14 February 2023, the Cyprus Tax Department (CTD) released additional "Frequently Asked Questions" (FAQs) regarding transfer pricing on 14 March 2023 in its newly created section.
The following list includes the extra questions covered by the FAQs on the CTD website:
9. How is the €750.000 threshold in the context of loan financing activities being determined in a tax year?
The threshold in the category of loan financing transactions is determined only by reference to the loan principal including interest charged but not paid.
10. Continuing from question 9 above, which balance is relevant in the case of loan financing activities (e.g. year end, average balance for the year, facility amount)?
The maximum loan balance (i.e. only the loan principal including interest charged but not paid) during the tax year should be used to determine the threshold in the respective tax year and be reported in the Summary Information Table.
11. Should the loans or any other monetary facilities including cash withdrawals (but excluding any balances arising from commercial transactions) granted by companies to the persons described in article 5(1)(z) & 5(2)(z)* of the Income Tax Law L. 118 (I)/ 2002 be taken into account for the purposes of assessing whether the threshold of €750.000 has been exceeded in the category of financing activities?
No, provided the company which is granting the loans or any other monetary facilities including cash withdrawals to its directors or to its shareholders who are individuals or their spouses or to their relatives up to and including the second degree of kinship (kindred), does not have as a taxable activity the provision of financing. In this specific case only, such balances should not be taken into account for the purposes of assessing whether the threshold of €750.000 has been exceeded in the category of financing activities and as such should not be reported in the Summary Information Table. No documentation with respect to these specific transactions in the local file is required.
* Articles 5(1)(z) and 5(2)(z) state that whenever a company provides a loan or other financial facility to its individual directors or shareholders, or to their spouses or relatives up to the second degree of kin, it will be deemed that this person has a monthly benefit equal to nine percent (9%) per year on the balance of such loan or other financial facility (including the monetary withdrawal during the month).
It is anticipated that the CTD will add more FAQs over time, thus it is advised that taxpayers keep an eye on the FAQs part of the CTD website for any potential updates.
*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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