On 30 June 2022, the Cyprus Parliament voted in to law a package of measures introducing detailed Transfer Pricing (TP) requirements for businesses. The measures are in line with the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations of the OECD and within the framework of Action 13 of the Base Erosion and Profit Shifting project.
The measures have been introduced through amendments to the Income Tax Law (ITL) and the issuance of Regulations. The Assessment and Collection of Taxes Law has also been amended to introduce penalties for non-compliance with the new TP documentation requirements.
So far the Arm’s Length Principle formed the legal basis for addressing TP matters, as per section 33 of the ITL. The package provides for new TP documentation requirements, subject to certain thresholds being exceeded. Furthermore, it introduces the option for taxpayers to apply for Advance Pricing Agreements.
The definition of connected parties as per Section 33(3) of the ITL has been amended, by introducing a 25% relationship test, in an effort to capture different relations based on which there is “control”. The different relations captured are as follows.
One company is connected with another company where:
a. The same person holds directly or indirectly a participation in at least 25% of the voting rights or share capital or has a right to a share of at least 25% of the income of both companies.
b. The same person and persons connected with that person hold directly or indirectly a participation in at least 25% of the voting rights or share capital or have a right to a share of at least 25% of the income of both companies.
c. A group of two or more persons hold directly or indirectly a participation in at least 25% of the voting rights or share capital or have a right to a share of at least 25% of the income of each company and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person with whom they are connected.
In addition, a company is considered as connected with another person if that person holds directly or indirectly a participation in at least 25% of the voting rights or share capital or has a right to a share of at least 25% of the income of that company or, that person and persons connected with him hold directly or indirectly a participation in at least 25% of the voting rights or share capital or have a right in at least 25% of the income of that company.
Furthermore two or more persons acting together to secure directly or indirectly, at least 25% of the voting rights or share capital or a right to a share of at least 25% of the income of a company, shall be treated as connected with one another, in relation to that company, and with any person acting on the directions of any of them to secure directly or indirectly 25% of the voting rights or share capital or a right to a share of at least 25% of the income of that company.
In case the 25% relationship test is met, TP documentation requirements will arise, assuming the relevant thresholds for the value of transactions with related parties, known as “controlled transactions”, have been exceeded (see below).
The new rules provide that Cyprus tax resident companies, as well as permanent establishments in Cyprus of non-resident companies, are obliged to maintain TP documentation supporting their controlled transactions with related parties, as defined in Section 33(3) of the ITL.
The TP documentation shall consist of the following:
• Master File
• Local File
Whilst the legislation provides for guidance to be issued by the Tax Department on the required contents of the Master File and the Local File, these are expected to be broadly aligned to the model contents in the BEPS Action 13 Report and the OECD Transfer Pricing Guidelines for MNEs and Tax Administrations.
In accordance with OECD TP Guidelines, the Master File must contain standardized and high-level information relevant for all group members of a multinational enterprise (MNE), including an overview of the group’s business and its overall transfer pricing policies. It should also cover the global allocation of income and economic activity in order to assist tax administrations in evaluating the presence of significant TP risk.
A Master File must be prepared when a company is part of a MNE group as the Ultimate Parent Entity (UPE) or Surrogate Parent Entity (SPE) for Country-by-Country Reporting purposes and has a reporting obligation (i.e. the consolidated revenue of the group exceeds €750 million). Both conditions must be met in order for a Master File to be required.
The Master File needs to be updated annually with any significant changes of the market conditions that may impact the information and data included therein.
Based on the same Guidelines mentioned above, the Local File should cover material transactions of the local taxpayer. It provides more detailed information (compared to the Master File) on intra-group transactions and documents how the taxpayer has complied with the Arm’s Length Principle on TP transactions. The Local File focuses on information relevant to the Transfer Pricing Study, covering transactions between related parties, including relevant financial information, a comparability analysis and the selection and application of the most appropriate TP method.
A Local File must be prepared by taxpayers if their transactions with connected persons either exceed (or should have exceeded based on the Arm’s Length Principle) the amount of €750,000 per annum in aggregate per category of transactions (sale/purchase of goods, provision/receipt of services, financing transactions, receipt/payment of IP licencing/royalties, etc.).
A person who holds a professional practicing certificate from the Institute of Certified Public Accountants of Cyprus, or from any other similar recognised body in Cyprus, needs to perform an assurance quality review of the Local File not later than the preparation deadline (see below).
As with the Master File, the Local File needs to be updated annually with any significant changes of the market conditions that may impact the information and data included therein.
Summary Information Table (SIT)
The SIT is an additional TP form that must contain high-level information on related party transactions, including details of the counterparties, their jurisdiction of tax residency, the category of intercompany transactions entered into, as well as their value.
Both the Master File and the Local File must be prepared by the Income Tax Return submission deadline for the respective tax year, which is 15 months from the end of the tax (and calendar) year. They must be made available by the taxpayer at any time after the preparation deadline and they must be submitted to the Tax Department within 60 days of a relevant request.
The SIT must be prepared on an annual basis and should be submitted to the Tax Department together with the Income Tax Return, as per the deadline mentioned above.
The Assessment and Collection of Taxes Law, as amended, introduces penalties for non-compliance with the new requirements as follows:
Failure to provide TP documentation upon request
Where a taxpayer has received a notice from the Tax Department to provide TP documentation (i.e. Master File, Local File) and fails to do so within the required timeframe of 60 days, the penalties vary as follows:
• Submitted between 61 and 90 days: €5,000
• Submitted between 91 and 120 days: €10,000
• Not submitted or submitted later than 120 days: €20,000.
Non-submission of SIT
Where a taxpayer fails to submit a SIT, a penalty of €500 will be imposed.
Advance Pricing Agreements (APAs)
An APA is a voluntary agreement between a taxpayer and tax authority/ies, which allows the parties to agree in advance on the transfer pricing methodology for specific intercompany transaction/s for a set period of time.
More specifically, an APA determines, in advance of a related party transaction, an appropriate set of criteria (e.g., method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time. The main benefit provided by an APA is the ability to obtain some degree of certainty regarding how the law will be applied in a given set of circumstances.
According to the Regulations issued, the Tax Department will examine the application and inform the taxpayer about its decision within 10 months from the date of the application. The Tax Commissioner has the right to extend the timeframe up to 24 months upon notification of the applicant.
When the application for an APA will be on a bilateral basis and will involve consultations between the Tax Department and the respective authorities of other countries, the Regulations state that the applicant will also need to contact those authorities and provide them with the relevant information.
The validity of an APA may not exceed 4 years, however under certain circumstances, the APA can be revised, either following an application by the taxpayer or at the sole discretion of the Commissioner of Taxation. Furthermore, the Tax Department has the authority to revoke or cancel an APA. Conditions, which could trigger such revisions or cancellations include, among others, material changes in critical assumptions noted in the APA, failure of the taxpayer to comply with the terms and conditions of the APA and changes in the tax law or the double tax treaty provisions affecting the APA.
The new provisions are effective from tax year 2022 onwards.