NEWSLETTER JANUARY 2023 (Download attachment below)
Transfer Pricing Study - New Regulation
On 30 June 2022, the Cyprus Parliament passed a law introducing detailed transfer pricing (TP) legislation, by amending the current Cyprus Income Tax & Assessment and Collection laws. The OECD Transfer Pricing Guidelines have been legislatively incorporated in Cyprus.
The transfer pricing legislation applies to Cyprus tax resident companies as well as permanent establishments of non-resident companies tax residents in Cyprus, regarding all transactions undertaken with related parties.
The Transfer Pricing new regulations are effective as from 1 January 2022 and they apply as from the tax year 2022.
Related party definition
One main rule of the law is the introduction of a 25% threshold in defining the connection of a legal entity with another legal entity/person for transfer pricing purposes.
In practice, this means two parties are considered related if the below conditions are met:
- If one party, either directly or indirectly holds 25% of the share capital of another company, or has at least 25% of the voting rights or rights to the income of the company.
- If the same person, either directly or indirectly holds at least 25% of the share capital of two companies, or has at least 25% of the voting rights or rights to the income of both companies.
Main requirements
The law provides for two types of requirements for tax residents in Cyprus.
- Must submit a summary information table that reflects high-level information about the taxpayer’s annual intercompany transactions.
- Must prepare, and keep in their records, a TP documentation file that consists of a local file and a master file subject to the exemptions explained below.
Summary information table
The summary information table includes high-level information about the taxpayer’s annual intercompany transactions, including details of the counterparties, category of intercompany transactions entered into, and amount per transaction category.
This table is to be completed in cases where there are transactions with related parties, irrespective of their value and is to be submitted along with the company's tax return for the year.
Transfer pricing documentation files
- Local file example and exemptions
The local file refers to material transactions of the local taxpayer and includes a transfer pricing study to justify compliance with the arm's length principle.
The local file obligation is applicable for taxpayers if their transactions with connected parties either exceed (or should have exceeded based on the arm’s-length principle) the amount of €750,000 in aggregate per category of transaction per tax year.
- Master file example and exemptions
The master file provides a high-level overview of the taxpayers business in order to place the group’s transfer pricing practices in their global economic, legal, financial, and tax context.
More specifically, the master file should provide an overview of the group business, including the nature of its global business operations, its organizational structure and its overall transfer pricing policies.
This requirement only applies to companies who act as the Ultimate Parent Entity (UPE) or Surrogate Parent Entity (SPE) of a multinational enterprise Group with a Country-by-Country Reporting obligation (eg with consolidated revenue above €750 million).
Advance Pricing Agreement (APA)
The new law provides for the possibility for a taxpayer to apply for an APA for transactions with related parties.
Through an APA a taxpayer can apply to the Tax Commissioner for pre-approval of the transfer pricing methodology selected, and/or the pricing of specific or existing cross-border transactions with related parties. The tax commissioner issues a decision within 10 months from the application. The APA can be valid for a maximum period of four years from the date of application.
The main benefit provided by an APA for a taxpayer is the ability to obtain some degree of certainty regarding how the law will be applied in a given set of circumstances.
Deadlines and penalties
The TP documentation files and summary information table for a particular year should be prepared not later than the due date for submitting the taxpayer’s Income Tax Return for that year (eg. currently 15 months after calendar year-end).