In accordance with a letter issued by the Cyprus Tax Department (CTD) to the Institute of Certified Public Accountants of Cyprus (ICPAC), the guidance as to the minimum profit margins the CTD would be willing to accept in back-to-back loan transactions (“the back-to-back regime”) will be abolished as of 1 of July 2017.

This decision was taken in order to align the Cyprus tax treatment of such arrangements with Action Points 8 – 10 (transfer pricing) of the OECD BEPS Action Plan.

Thus, from July 1, 2017 and onwards, all related-party financing transactions will have to be supported by Transfer Pricing (TP) Studies. Such TP studies will be required both for the issuing of tax rulings and for corporate tax calculations and will be prepared by independent experts. The TP rules have not yet officially been concluded within the Cyprus tax laws, thus it is expected to follow the relevant OECD TP guidelines. Furthermore all relevant rulings issued before 1 July 2017 involving the back-to-back finance regime will cease to be applicable on 1 July 2017. Any back-to-back finance transactions remaining in place after 1 July 2017 will need to be supported by TP Studies for that date and onwards.

We expected that the CTD will issue further guidance on the practice to be adopted and further details will be provided.

Having in mind the above, we strongly recommend that such existing intra-group financing arrangements should be reviewed in order to assess the potential impact of the upcoming changes and to take corrective action, if required.

Our office is at your disposal to discuss in deeper how the above developments may affect your business.