Corporation Tax Return for 2018 incorporates Transfer Pricing Requirements

As we have reported before, as from 1 July 2017 all related-party financing transactions need to be supported by Transfer Pricing (TP) Studies based on the relevant OECD standards and prepared by independent experts.

The Cyprus Tax Department has incorporated the relevant TP requirements in the Corporation Tax Return for 2018. Part 3 of the return includes two questions about the new TP provisions, asking for information on whether a TP Study has been performed covering the relevant year of assessment or whether a simplified approach (known as “Simplification Method” or “Safe Harbour Rule”) has been utilised.

It is reminded that the Simplification Method provides that a financing company meeting the substance requirements covered in the relevant Tax Circular dated 30 June 2017 and engaging in purely intermediary intra-group financing activities will be deemed to comply with the arm’s length principle if it receives a minimum return of 2.3% (2% after-tax) on assets.

It is stressed that the Tax Circular referred to above provides that the use by a taxpayer of the Simplification Method will be subject to the exchange of information rules set under the Directive on Administrative Cooperation.

Considering the above and also the fact that, always depending on the facts of each case, the Transfer Pricing Study approach generates a much lower rate of return than the one provided by the Simplification Method, the use of the former approach is generally preferred.

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