CYPRUS Trends and Developments Contributed by: Marios Palesis and Theodora Charalambous, Kinanis LLC
Amongst the things, the FAQ clarified the abol - ishment of the back-to-back Circular, as from 1 January 2022. In fact, on 5 January 2023 the Commissioner published a Circular abolishing the back-to-back Circular with effect from 1 Jan - uary 2022. This raises a question on the treat - ment of the back-to-back financing arrange - ments that do not meet the local file threshold and therefore cannot be supported by a local file, for the tax year 2022 and onwards. Penalties In order to guarantee compliance with the law, the new regulations intend to penalise the tax - payers who fail to provide the local file or master file upon request by the Cyprus tax authorities. The local and master file must be provided to the Cyprus tax authorities within 60 days upon request. The range of penalties for late or non- compliance vary from EUR5,000 (for late sub - missions) to EUR20,000 (no submission or if the delay to provide the documentation exceeds 120 days). The penalty for failure to submit the SIT is EUR500. Documentation Contents The new regulations also list the mandatory con - tents of the documentation requirements. Local files should be prepared for the local entity and must include: • the company’s management and organisa - tional 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 finan - cial data; and
• an explanation of the use of the TP results to arrive at taxable income. In addition, 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 transactions; • the selection and application of the most appropriate TP method; • the conclusion of the arm’s length price; • any relevant adjustments; and • the decision of the APA or tax ruling, if any. When it comes to the master file, the required information relates to the strategies and policies followed by the group, rather than the entity. The contents of the master file must include: • a group organizational structure • a description of the multinational enterprise’s (MNE) business activities including the drivers of business profit; • the TP policies of the group; and • the geographic markets for the group’s prod - ucts and services. Also, the group’s intangibles must be listed, together with the MNE’s intercompany financial activities and tax positions. Cyprus taxpayers having transactions with a related party shall consider the impact of the new rules, the thresholds and accordingly undertake the relevant analysis, perform the benchmark and establish the arm’s length pricing of the con - trolled transaction. The final step for a taxpayer is to put the required TP documentation in place and they are one step closer to the Cyprus tax compliance shelter.
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