CYPRUS Law and Practice Contributed by: Stella Strati, Patrikios Legal
4.2 Key Treaty Jurisdictions for Inbound Investment Cyprus enjoys a wide network of DTTs, as it has entered into such with more than 70 countries. The majority of these treaties follow the OECD Model Tax Convention on Income and on Capital (the “OECD Model”) – with the exception of the DTT with the USA, which follows the most recent model of US agree - ments. Foreign investors usually use Cyprus compa - nies to make investments in local corporate stock or debts. 4.3 Tax Authority Scrutiny of “Treaty Shopping” Practices The author is not aware of any cases in which the local tax authorities have challenged the use of treaty- country entities by residents of non-treaty countries. 4.4 Transfer Pricing Issues for Inbound Investors The Cyprus transfer pricing rules (as such rules apply from 1 January 2022 onwards) cover all types of transactions between related parties in excess of EUR750,000 per category of transaction. The types of transaction include sale and purchase of goods, pro - vision and receipt of services, financing transactions and any IP-related transaction, financing transactions, as well as other transactions between related parties. In relation to the definition of the connection between related parties, the 25% relationship test applies. The current thresholds for a local file are the following: • transactions for the sale of goods: EUR5,000,000; • financing transactions: EUR10,000,000; and • all other transactions: EUR2,500,000. Moreover, transfer pricing documentation compli - ance requirements have been introduced in relation to Cyprus tax-resident persons and/or permanent establishments of non-Cyprus tax-resident entities located in Cyprus that are engaging in local or cross- border transactions. Such transfer pricing documen - tation must 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.
The Cyprus transfer pricing rules also include advanced pricing agreement procedures. 4.5 Challenges to Related-Party Limited Risk Distribution Arrangements Tax authorities do challenge related-party transac - tions in general. As already mentioned in 4.4 Transfer Pricing Issues for Inbound Investors , Cyprus has re- enforced its transfer pricing regulations by introducing the requirement for performing transfer pricing studies for all related-party transactions. 4.6 Local Transfer Pricing Rules and OECD Standards Cyprus’ transfer pricing rules, which became effec - tive on 2 January 2022, do not deviate from OECD standards. Transactions between related companies are obliged to follow the arm’s-length principle as set out in the OECD Transfer Pricing Guidelines. 4.7 Transfer Pricing Disputes and Mutual Agreement Procedures Transfer pricing rules have been adopted since 2017 (and updated in 2022) and, given that this is some - thing relatively new in Cyprus, the author is not aware of any disputes resolved by local authorities. However, owing to the fact that extensive reform of the appli - cable transfer pricing rules in Cyprus took place in 2022, the local tax authorities are expected to be more aggressive when it comes to transfer pricing matters from now on. 5. Taxation of Non-Local Corporations 5.1 Compensating Adjustments The Cyprus tax authorities do not have any experi - ence of mutual agreement procedures (MAPs) under a transfer pricing arrangement. Therefore, if an adjust - ment is made from a foreign tax authority, the cor - responding adjustment will not be allowed/made for Cyprus tax purposes. The reason for this is the absence of a relevant regulatory framework. 5.2 Local Branches and Local Subsidiaries The taxation of local branches of foreign corporations is no different to that of local subsidiaries of foreign corporations.
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