Frequently Asked Questions on Back to Back Financing Arrangements


The Cyprus Tax Department issued, on 24 January 2022, a set of Frequently Asked Questions (FAQs) related to financing arrangements between related parties of a so called Back to Back nature. These FAQs are related with Interpretative Circular 3 issued by the tax authorities on 30 June 2017 entitled “Tax treatment of intra group Back to Back financing transactions” (the Circular).

The Circular covers the application of Transfer Pricing provision to related party financing operations based on the arm’s length principle supported by the OECD. You can find more about the Circular in our related newsfeed.


Main points from the FAQs

The answers to the FAQs are applicable to all transactions that fall within the scope of the Circular and cover financing arrangements concluded as from the date the FAQs were issued and those arrangements previously concluded, which had not been examined by the Tax Department by that date.

Any supporting Transfer Pricing documentation prepared should not be filed with the Tax Department but should only be kept and provided upon request.

The Transfer Pricing Study should be prepared by someone who possesses sufficient technical knowledge, competence and practical experience to prepare a study based on the relevant Transfer Pricing Guidelines by the OECD and the provisions of the Cyprus tax legislation.

If a company opts for the simplification measure (2% margin after tax) because it merely acts as a purely intermediary entity in a financing arrangement is not required to prepare a Transfer Pricing Study but should prepare a functional analysis.

If a company does not prepare a Transfer Pricing Study and does not come under the simplification measure, the Tax Department may assess its taxable profits on the basis of the available information and at its own discretion.

A transfer pricing should be prepared when an intra group loan is initiated and updated when:

  • new loans are provided or received by the company; 
  • significant terms of the existing loans change or amended;
  • the functional profile of the company changes;
  • the market and economic conditions change significantly (if applicable).

The above list is indicative and it is not exhaustive.


“Specialized personnel” as mentioned in the Circular should have sufficient knowledge, possess competence and experience to perform decision making functions and to control the risks of a controlled transaction under consideration. With regards to the meaning of the term “control over risk”, reference is made to the Circular and the OECD Transfer Pricing Guidelines.

It is clarified that there is no requirement for a company to hire specialised personnel as long as its directors have sufficient knowledge, competence and experience to perform the decision-making functions and to control the risks of the transactions under consideration.


Contributions from shareholders who are physical persons fall within the scope of the Circular regardless of whether these are interest bearing or not. However, contributions which are considered equity do not fall under the definition of financial means and instruments as described in the Circular and thus do not fall within its scope.


There is no need to amend the terms of the loan agreements following the application of the arm's length principle or the application of the minimum 2% margin after tax under the simplification measures.


The Circular states that in cases where the simplification measure is used, the minimum margin of 2% after tax is applied on the value of the company’s assets. The term "company's assets" is interpreted as the assets relating to the intra group back-to-back financing transactions (i.e. loan receivables) only. Moreover, the value of the loan receivables means their principal amount. Under specific facts and circumstances accrued interest could also be included in the value of the company's assets. Examples include a loan agreement, which provides for capitalization of the interest and when the actual conduct of the parties accrued interest could be considered as additional financing.


A company, which carries out other activities in addition to back-to-back intra-group financing activities still falls within the scope of the Circular in respect of its back-to-back financing transactions.


The Circular applies to both cross-border transactions and domestic transactions between related companies.

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