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The Cyprus Tax Department (CTD) has issued a new Circular providing guidance on transfer pricing documentation requirements and optional simplification measures for certain types of controlled transactions.
The Circular applies to Cyprus tax resident persons or permanent establishments in Cyprus of non-Cyprus tax resident persons who are exempt from the obligation to maintain a Cyprus Local File, provided their controlled transactions do not exceed or would not exceed, based on the arm's length principle, the value of €750,000 per annum. This guidance and the simplification measures take effect from 1 January 2022.
Transfer Pricing Documentation Requirements:
According to the Cyprus income tax legislation, related party transactions should be conducted on an arm's length basis. Failure to comply may result in the adjustment of taxable income by the CTD. To support the arm's length nature of controlled transactions that are not required to be documented in a Cyprus Local File, the following minimum transfer pricing (TP) documentation should be maintained:
Brief functional analysis (functions, assets, risks).
Description of the functional profile of the entity based on the results of the functional analysis.
Reasoning for the selection of the most appropriate TP method.
Determination of the arm's length price(s) supported by relevant benchmarking results or other relevant economic analysis in line with the OECD TP Guidelines.
The minimum TP documentation should be submitted to the CTD upon request within 60 days.
Simplification Measures for Certain Controlled Transactions:
Persons exempt from preparing a Cyprus Local File can choose to apply simplification measures for the pricing of specific types of controlled transactions.
The simplification measures are applicable to the following transactions:
a) Financing granted to related parties financed by borrowings.
b) Financing granted to related parties financed by equity.
c) Financing obtained from related parties for use in the business.
d) Low-Value Adding Services (LVAS) received or provided.
However, the simplification measures cannot be applied if the total value of financial transactions (for measures a-c) or services transactions (for measure d) exceeds €750,000 per annum per category. Additionally, the measures cannot be used if reliable internal comparables are available to determine the arm's length price.
The Circular provides detailed requirements for each type of simplification measure:
a) Financing granted to related parties financed by borrowings:
Minimum pre-tax net return of 2.5% p.a. on average outstanding receivable balances.
Required supporting documentation includes a functional analysis, loan details, reasons for financing by borrowings, and workings for applying the simplified return in the income tax computation.
b) Financing granted to related parties financed by equity:
Interest rate should be at least equal to the ten-year government bond yield rate of the borrower's jurisdiction increased by 3.5%.
Supporting documentation includes a functional analysis, loan details, reasons for financing by equity, and workings for applying the simplified interest rate.
c) Financing obtained from related parties for use in the business:
Interest expense should not exceed the ten-year government bond yield rate of the Republic of Cyprus increased by 1.5%.
Supporting documentation includes a functional analysis, borrowing details, justifications for the simplification measure, and workings for applying the simplified interest rate.
d) Provision or receipt of Low-Value Adding Services (LVAS):
Pricing determined on a cost + mark-up basis, with a minimum mark-up of 5% for services provided and a maximum mark-up of 5% for services received.
Supporting documentation includes a functional analysis, service categories, beneficiary information, justifications for LVAS classification, workings for determining the relevant cost pool and mark-up, and application of the simplified measure in the income tax computation.
Practical Application and Reporting Requirements:
Persons opting to apply the simplification measures must disclose their election to the CTD by completing the relevant section in their Income Tax Return or Summary Information Table for Controlled Transactions before the deadline. The supporting documentation for the simplification measures should be submitted to the CTD upon request within 60 days.
Deviation from the prescribed minimum or maximum returns/rates/mark-ups for the simplification measures requires preparation of the minimum TP documentation. The CTD will not make downward adjustments if the accounting profit from controlled transactions is higher than the profit resulting from the simplification measures or a transfer pricing study.
Cross-border controlled transactions subject to the simplification measures should be treated as reportable transactions in accordance with relevant legislation.
*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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