CYPRUS Trends and Developments Contributed by: Marios Palesis and Theodora Charalambous, Kinanis LLC
are exempt from the obligation to maintain the Cyprus local file; however, they need to prepare simplified transfer pricing documentation. Such companies are also not obliged to maintain the master file, provided that they are not the ulti - mate parent company or surrogate parent entity as defined in the Law on administrative coopera - tion in the field of taxation. Deadline The local file, master file and simplified report should be prepared until the date of submission of the tax return for the relevant tax year and shall, upon the relevant request from the tax authorities, be made available to them. Also, a licensed auditor should undertake an assurance quality review of the local file by the submission deadline of the taxpayer’s tax return. The documentation file must be updated every tax year, and the update must be completed within 12 months from the end of the tax year in which the need for update has arisen. The Commissioner of Taxation has the power to determine specific issues of updates that are deemed necessary regarding the content of the documentation file either on an annual or per - manent basis. Simplified Transfer Pricing Documentation In order to ensure that the entities not subject to the requirement of preparing a local file comply with the arm’s length principle, in July 2023 the Cyprus tax authorities published the Transfer Pricing Circular 6/2023, setting new require - ments for the entities not exceeding the mate - riality thresholds in the respective category of related party transactions. The simplified transfer pricing documentation for entities exempted from the requirement of a
local file preparation must include the following minimum contents: • a short description of functional analysis (functions, assets, risks); • characterisation of the entity, based on the functional analysis performed; • the rationale for selecting the most appropri - ate transfer pricing method; and • a determination of the arm’s length results, based on the benchmark analysis. Circular 6/2023 also implies the utilisation of unilateral safe harbour rules, where applicable. Entities engaging in cross-border transactions may employ these safe harbour rules, which are exclusively applicable to entities that do not exceed (or should not exceed) the thresholds for local file preparation in the relevant category. It should be noted that the provisions of unilateral safe harbour rules in cross-border transactions will be reportable under the DAC6 legislation in Cyprus, under Hallmark E.1. It is critical to emphasise that the initial threshold for local files was established at EUR750,000 per category of transaction. However, in response to numerous requests from taxpayers and tax experts, the Cyprus tax authorities announced, on 1 February 2024, the increase to the mate - riality threshold for tax years 2022 onwards to EUR5 million for related party transactions in the category of financing transactions and EUR1 million for the rest of the categories of related- party transactions (trade of goods/services/intel - lectual property/other). Advance Pricing Arrangement A significant input to the regulations was the option for an advance pricing arrangement (APA). Cyprus taxpayers can now seek a pre- agreement with the Cyprus tax authorities for the
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