Further to our previous newsfeeds on this, the Cyprus Tax Department issued new Frequently Asked Questions (FAQs) on its website, providing guidance on certain aspects of the Transfer Pricing rules introduced with effect from 1 January 2022.
Below is a selection of the new questions and answers appearing on the website mentioned above.
Transactions and Balances Between Related Parties
Question: Company “A” has an outstanding interest free payable balance to Company “B”. Should Company “A”:
(a) take into account this outstanding interest free payable balance for the purposes of assessing whether the applicable Local File threshold is exceeded or
(b) report the outstanding interest free payable in the SIT or
(c) include the outstanding interest free payable in the Local File?
Answer: Applicable for years 2022 and 2023 only:
Company “A” shall not,
(a) take into account the outstanding interest free payable for the purposes of assessing whether the threshold of article 33(7) of the ITL has been exceeded; or
(b) report the outstanding interest free payable in the SIT.
In the case where the arm’s length article of the Income Tax Law is triggered with respect to such outstanding interest free payable, then the arm's length nature of the resulting allowable deduction will be evaluated by reference to the Local File or Minimum Transfer Pricing documentation (if applicable) that has been prepared by the Lender (i.e. Company “B”).
For years 2024 and onwards:
Company “A” shall,
(a) take into account the outstanding interest free payable for the purposes of assessing whether the threshold of article 33(7) of the ITL has been exceeded; and
(b) report the outstanding interest free payable in the SIT.
Again, any arm’s length implications from the Lender’s side will be evaluated by reference to the Local File or Minimum Transfer Pricing documentation (if applicable) prepared.
Question: Company “A” manufactures goods “X” and company “B” is a wholesaler of goods “X”.
The two related companies are Cyprus tax residents and company “A” sells goods “X” to Company “B”.
Do both companies have an obligation to report the controlled transaction in the SIT?
Answer: Yes.
Company “A” will report the transaction in category “Goods” under the column “Sale of Goods” and company “B” will report the same transaction in category “Goods” under the column “Purchases of Goods” of the SIT.
Summary Information Table (SIT)
Question: Company “A” has controlled transactions in category “A” that cumulatively do not exceed the required threshold on the basis of the arm’s length principle in a tax year. Is company “A” required to report these transactions in the SIT?
Answer: Yes.
Company “A” is required to report the transactions in category “A” in the SIT irrespective of whether these have not exceeded cumulatively the required threshold.
Safe Harbour Rates
Question: Company “A” has controlled transactions in Category “Financial Transactions” that exceed the required threshold in a tax year.
Can Company “A” make use of the Safe Harbour rates of Circular 6/2023?
Answer: No.
The use of the simplification measures and Safe Harbour rates as per Circular 6/2023 is applicable only in case where the controlled transactions in category “Financial Transactions” cumulatively do not exceed the required threshold in a tax year.
Local File
Question: Who can carry out the quality assurance audit to the Local File?
Answer: A person who holds the practicing certificate issued by the Institute of Certified Public Accountants of Cyprus (ICPAC) or by any other recognized body of accountants in the Republic of Cyprus, can carry out a quality assurance audit to the Local File.
Question: Can the person who prepared the Local File be the same with the person who will carry out the quality assurance audit to that Local File?
Answer: Yes, provided that that the person who carried out the quality assurance audit to the Local File holds a practicing certificate issued by ICPAC.
Question: Company “A” has controlled transactions in Category “A” which cumulatively exceed the required threshold and therefore a Local File is prepared and kept.
Is it mandatory to upload the signed confirmation of the quality assurance audit of the Local File upon submission of the SIT?
Answer: Yes.
The submission of the signed confirmation of the quality assurance of the Local file is mandatory upon submission of the SIT.
Controlled Transactions Under Category A
Question: What are the options of company “A” in case it has controlled transactions in category "A" that cumulatively do not exceed the required threshold on the basis of the arm's length principle in a tax year for the purposes of Transfer Pricing documentation?
Answer: In case company “A” has controlled transactions in category “A” in which cumulatively do not exceed the required threshold in a year it can opt for one of the following three options:
a) Meet the minimum simplified Transfer Pricing documentation requirements as per paragraph 4 of Circular 6/2023; or
b) Make use of the safe harbour rules for categories “Financial Transactions” and “Low Value Adding Services” and comply with the minimum simplified Transfer Pricing documentation requirements as per paragraphs 4 and 5 and section D of Circular 6/2023; or
c) Prepare a Transfer Pricing Study/include the controlled transactions in a Cyprus Local File (if applicable).
