CYPRUS Law and Practice Contributed by: Marios Palesis and Theodora Charalambous, Kinanis LLC
The applicable safe harbour will be 2.5% after the deduction of allowable expenses. The minimum return of 2.5% will be applicable on the average balance of loan receivable for the relevant tax year, including the interest accrued but not paid. Provision of financing in the form of loans or cash advances to related parties These are funded out of own capital (such as issued share capital and share premium, non-refundable capital contributions, and retained earnings). The applicable safe harbour will be the ten-year gov - ernment bond of the borrower’s country plus 3.5%. The minimum return will be applicable on the average balance of loan receivable for the relevant tax year, including the interest accrued but not paid. Receiving financing in the form of loans, bonds or cash advances from related parties that carry interest is considered eligible, provided the borrowed funds are used for business purposes. The applicable safe harbour shall not exceed the yield of the ten-year government bond for Cyprus plus 1.5%. The minimum return applies to the average balance of the loan payable for the relevant tax year, including the interest that has accrued but not been paid. Conducting of low value-adding services For the purposes of this Circular, low value-adding services are defined as services that: • are of a supportive nature; • are not part of the core activities of the group; and • do not involve unique and valuable intangibles or a significant risk for the service provider. The applicable safe harbour should be a minimum 5% mark-up on the relevant costs. If the entity under examination is the recipient of low value-adding ser - vices, the maximum applicable mark-up is 5%. The use of safe harbour rules on the above-mentioned types of transaction must be supported by an appropri - ate minimum documentation. Such documentation will include a short description of functional analysis and the characteristics of the entity, based on the functional
analysis performed. For financing-type transactions (see above), the documentation must also include: • analytical descriptions of the loans; • the criteria met for the use of safe harbour; and • the relevant numerical analyses that led to the tax - able income. For the low value-adding services, the minimum docu - mentation must consist of: • descriptions of the low value-adding services; • justification of the reasons the services considered eligible for the safe harbour; and • the relevant analyses and calculations. The use of safe harbour should be declared in the relevant section of the taxpayer’s income tax return. If reliable internal comparables are available, the tax - payer is not permitted to use the safe harbour rules. The simplified TP documentation must be made avail - able within 60 days of the CTA’s request, either by the taxpayer or a person authorised to act as a repre - sentative of the taxpayer. The provisions of unilateral safe harbour rules described above in cross-border transactions will be reportable under the DAC6 legislation in Cyprus, under Hallmark E.1. 11.2 Rules on Savings Arising From Operating in the Jurisdiction Cyprus does not have specific rules governing sav - ings that arise from operating in Cyprus. 11.3 Unique Transfer Pricing Rules or Practices Cyprus does not have any notable unique rules or practices applicable in the TP context. 11.4 Financial Transactions Cyprus follows Chapter X of the OECD TP Guidelines as a reference for financing transactions. In addition, the Cyprus tax authorities have published three safe harbour rates that taxpayers may choose to apply for financing transactions. These are available to compa -
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