CYPRUS Law and Practice Contributed by: Marios Palesis and Theodora Charalambous, Kinanis LLC
9.2 Arm’s Length Principle Cyprus TP rules do not depart from the arm’s length principle. 9.3 Impact of the Base Erosion and Profit Shifting (BEPS) Project Cyprus largely complies with the minimum require - ments of the OECD’s BEPS project. In particular, the new TP legislation has been introduced to align with Action Points 8–10 “Aligning transfer pricing out - comes with value creation” of the BEPS initiative. 9.4 Impact of BEPS 2.0 There is no clear guidance regarding Cyprus’ perspec - tive on the OECD’s BEPS 2.0 initiatives. 9.5 Pillar One Amount B Cyprus has not implemented Pillar One Amount B. 9.6 Entities Bearing the Risk of Another Entity’s Operations There are no provisions in the legislation for one entity to bear the risk of another entity’s operations by guar - anteeing the other entity a return. 9.7 Allocation of Profits to Permanent Establishments (PEs) Cyprus has specific provisions governing the alloca - tion of profits to permanent establishments (PEs). In particular, Article 36 (3) of the Income Tax Law pro - vides that profits derived by a Cyprus tax resident person from a foreign PE are exempt from Cyprus tax. However, if losses of the foreign PE were previously deducted in Cyprus under Article 13, any subsequent profits of that PE, up to the amount of the losses previ - ously claimed, are included in taxable income. A taxpayer may elect for the foreign PE profits not to be exempt and instead be taxed in Cyprus, with relief for foreign tax granted under Articles 35 and 36 (foreign tax credit). Double tax relief will not apply where the taxpayer has opted to claim losses under the specific loss-relief provisions provided in the law.
Under Article 36 (4), the exemption does not apply where: • more than 50% of the PE’s activities directly or indirectly generate investment income; and • the foreign tax burden on the PE’s income is sub - stantially lower than the Cyprus tax burden; or • the PE is located in a jurisdiction included on the EU list of non-cooperative third countries for tax purposes. 10. Relevance of the United Nations Practical Manual on Transfer Pricing 10.1 Impact of UN Practical Manual on Transfer Pricing The UN Practical Manual on Transfer Pricing does not have any impact on TP practice or enforcement in Cyprus. 11. Safe Harbours or Other Unique Rules 11.1 Transfer Pricing Safe Harbours As per Circular 6/2023, published by the Cyprus tax authorities on 6 July 2023, entities entering into cross- border transactions can use the safe harbour rules, which are only applicable for entities not exceeding (or that should not be exceeding) the total aggregate amount of EUR5 million of related party transactions in the category of financing and the aggregate amount of EUR1 million of related party transactions in the remaining categories. The safe harbour rules apply to the following types of transactions. Types of Transactions Provision of financing in the form of loans or cash advances to related parties These are funded out of financial means, such as: • bonds; • loans from related parties; • interest-free loans from the shareholders; • cash advances; and • bank loans.
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