CYPRUS Law and Practice Contributed by: Marios Palesis and Theodora Charalambous, Kinanis LLC
1. Rules Governing Transfer Pricing 1.1 Statutes and Regulations On 30 June 2022, transfer pricing (TP) regulations were voted on and incorporated into the Cyprus Income Tax Law, with effect from 1 January 2022. These regulations introduce broad TP rules requiring OECD-compliant TP documentation, based on Base Erosion and Profit Shifting (BEPS) Action 13 recommendations. 1.2 Current Regime and Recent Changes On 30 June 2017, the Cyprus tax authorities published a circular on back-to-back financing arrangements, with effect from 1 July 2017 – this was abolished on 5 January 2023 (with effect from 1 January 2022) fol - lowing the introduction of the TP regulations. The circular required that a comparability analysis for the purpose of describing intra-group financing trans - actions be performed for determining the applicable arm’s-length remuneration. The main factors exam - ined in the comparability analysis are the requirements for sufficient equity level for assumption of risks and adequate substance in Cyprus. The TP regulations, effective from 1 July 2022, require the following. A summary information table (SIT) must be completed and submitted electronically by all taxpayers by the same deadline as for tax returns. The SIT includes information on related parties with which the company transacts, and the nature and val - ue of the transactions. The nature of the transactions is divided into categories including: • goods; • services; • intellectual property and intangibles; • financial transactions; and • other transactions. A local file must be prepared when the materiality threshold of EUR10 million in the category of financ - ing transactions, EUR5 million in the category of purchase/sale of goods, and EUR2.5 million in the remaining categories is met.
The thresholds consider the aggregate amount of each category and are based on reference to the absolute values of the controlled transactions for each category occurring in a tax year. Local files should be prepared for the local entity, and must include: • the company’s management and organisational structure; • a general description of the activities of the group; • the group structure; • the key competitors; • the relevant financial information, including the audited financial statements; • the summary schedules of the relevant financial data; and • an explanation of the use of the TP results to arrive at taxable income. Also, local file preparers should include: • a description of the controlled transactions; • copies of the intercompany agreements; • a detailed functional analysis with respect to each documented category of transaction; • the selection and application of the most appropri - ate TP method; • the conclusion of the arm’s length price; • any relevant adjustments; and • the decision of the advance pricing agreement (APA) or tax ruling, if any. The auditor of the company must review the Cyprus local file to ensure its accuracy and completeness by the deadline for submitting the corporation tax return for the tax year in question. A master file must be prepared when the consolidated revenues of the group exceed EUR750 million. The required information for the preparation of a mas - ter file relates to the strategies and policies followed by the group, rather than the entity. The contents of the master file must include: • the group organisational structure;
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