Further to our previous newsfeeds on this, on 12 October 2026, the Cyprus Tax Department issued Circular 5/2026, revising the returns provided under the simplification measures applicable for the financing transactions as previously provided in Circular 6/2023.
The Circular applies to all taxpayers with related party transactions, known as “Controlled Transactions”, which are exempted from the obligation to be documented in a Cyprus Local File.
Taxpayers engaged in Controlled Transactions which fall under the following subcategories are assumed to comply with the Arm’s Length Principle if those transactions are within the safe harbours. Circular 6/2023 introduced safe harbours for the following sub-categories of Controlled Transactions:
a. Financing transactions such as loans or cash advances granted to related parties which are funded out of financial means (such as bonds, loans from related parties, interest free loans from the shareholders, cash advances and bank loans).
b. Loans or cash advances receivable from related parties which have been funded out of own capital (e.g. issued share capital and share premium, non-return capital contributions, and retained earnings).
c. Funding received from related parties (through interest bearing loans, bond issuance, or cash advances) to the extent that the funds borrowed are used in the business.
d. Low value-adding services.
Use of a safe harbour is permitted only if the total value of Controlled Transactions in the particular sub-category, together with the value of the remaining Controlled Transactions which belong to the same main category as with the sub-category, does not exceed (or should have not exceeded based on the Arm’s Length Principle), certain thresholds, which have been revised over time. They currently are as presented in our related newsfeed.
The changes introduced by Circular 5/2026 on the safe harbour rules are presented in the table below.
| Transaction | Functional outcome | Minimum/Maximum return for the tax years 2022 – 2025 | Revised Minimum/Maximum return for the tax year 2026 | Direction of change |
Loans or cash advances receivable from related parties which are funded out of financial means.) | The examined business does not control the relevant financial risks and lacks the financial capacity to assume such risks. | Minimum 2.50% | Minimum 0.50% | Reduced by 2.00% |
| On all other financing transactions falling within the provisions of Paragraph 14 of Circular 6/2023. | Minimum 2.00% | Reduced by 0.50% | ||
| Loans or cash advances receivable from related parties which are funded out of own capital. | Loans or cash advances provided to related parties that are equity-funded | 10-year government bond yield of the country in which the borrower operates + 3.50% | 10-year government bond yield + 2.25% | Minimum Spread reduced by 1.25% |
| Loans payable to related parties to the extent that the funds obtained are used in the business. | Loans or cash advances received from connected persons | Cyprus 10-year government bond yield of Cyprus + 1.50% | Cyprus 10-year government bond yield + 1.75% | Maximum cap increased by 0.25% |
| Low value-adding services | Controlled transactions that involve low value-added services | 5% mark-up | 5% mark-up | No change |
For foreign-currency financing, taxpayers should confirm that the government bond reference rate is aligned with the currency of the transaction or consider requesting a rate from the Transfer Pricing Unit of the Tax Department where no suitable reference is available.
The revised rates apply from the 2026 tax year onwards and will remain in effect until further revision by the Tax Department.
