Transfer Pricing Study - Group financing Companies

With effect from 1 July 2017, any Cyprus tax resident company carrying out intra-group financing transactions must prepare and submit to the Cyprus Tax Authorities a Transfer Pricing study supporting each intra-group financing transaction conducted to determine whether the agreed remuneration complies with the arm’s length principle i.e. corresponds to the price which would have been accepted by independent entities in comparable circumstances, taking into consideration the economic nature of the transaction.

The previously established acceptable profit margins under the back-to-back scheme will be applicable for transactions up to 30 June 2017 inclusive.


As per Section 2 of the Income Tax Law 118(I)/2002 a group financing Cyprus tax resident company i.e. whose management and control is exercised in Cyprus must have an actual presence in Cyprus. In this respect we note that the actual presence criteria take into account, the following:


  • The number of board of Directors members of the company that are Cyprus tax residents.
  • The  number  of board  of Directors  meetings  held in Cyprus  and the  main  management   and commercial  decisions  taken  in Cyprus.
  • The number of shareholders’ meetings taking place in Cyprus.


For transfer pricing purposes, an appropriate comparability analysis must be carried out in order to determine whether transactions between related entities are comparable to transactions between independent entities.


The comparability analysis consists of two parts:

  1. I. Identification of the commercial or financial relationship between related entities and determination of the conditions and economically relevant circumstances attaching to those relations in order to accurately outline the controlled transaction;

     II.  Comparison of the accurately outlined conditions and economically relevant circumstances of the controlled transaction with those of comparable transactions between independent entities.


In order to accurately perform the comparability analysis, the below (not exhaustive) must be examined and performed:

  • The role of each of the entities participating in the controlled transactions and their interdependencies between the functions performed
  • The structure and organization of the group
  • The contractual terms agreed
  • A functional analysis that takes into account all economically significant functions, assets used or contributed and the risks assumed by the parties
  • The economic rationale behind each transaction
  • An analysis of the risks in financial relations including an evaluation of the ability to assume and manage the risks involved in each transaction

Simplified measures can be used in cases when a group financing company pursues   a  purely  intermediary   activity,   grants   loans  or  advances   to related  entities  which  are refinanced  by loans  or advances  granted  by related  entities.

The  transactions   are deemed  to  comply  with  the  arm's  length  principle  if the analyzed  entity  receives  in relation  to its controlled  transactions   under  analysis,  a minimum return  2%  after-tax   on  assets.  This percentage   will be regularly   reviewed the Tax Department based on relevant market analyses.