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 mini - mum return of 2.5% will be applicable on the average balance of loan receivable for the rel - evant 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 government 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 an interest rate, to the extent that the funds borrowed are used in the business The applicable safe harbour shall not exceed the ten-year government bond for Cyprus plus 1.5%. The minimum return will be applicable on the average balance of loan payable for the relevant tax year, including the interest accrued but not paid. Conducting of low value-adding services For the purposes of this Circular, low value-add - ing 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 intan - gibles or a significant risk for the service provider.
The applicable safe harbour should be a mini - mum 5% mark-up on the relevant costs. If the entity under examination is the recipient of low value-adding services, 5% shall be the maxi - mum applicable mark-up. The use of safe harbour rules on the above-men - tioned types of transaction must be supported by an appropriate minimum documentation. Such documentation will include a short descrip - tion of functional analysis and characterisation 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 taxable income. For the low value-adding services, the minimum documentation must consist of: • descriptions of the low value-adding services; • justification of the reasons the services con - sidered 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 avail - able, the taxpayer is not permitted to use the safe harbour rules. The simplified TP documentation must be made available within 60 days upon the CTA’s request, by the taxpayer or a person authorised to act as a representative of the taxpayer. The provisions of unilateral safe harbour rules described above in cross-border transactions
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