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:
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:
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:
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.