Transfer Pricing Law and Regulations

Enforced into Cyprus Tax Law and which is applicable for the tax years 2022 onwards.

Overview
As you might be aware, on 30th June 2022, the Cyprus Parliament voted for a number of amendments in relation to the Cyprus Income Tax Law and Assessment and Collection of Taxes Law as well as the issuance of new Regulations in respect of the arm’s length principle and the requirements of Transfer Pricing (‘’TP’’) compliance obligations for Cyprus tax resident companies engaging in transactions with related parties.

The amendments follow the OECD Transfer Pricing Guidelines that most countries have already adopted many years ago.

The law amendments are effective from the tax year 2022 onwards.
The new legislation provides for specific penalties for non-compliance with the new obligations.

As part of the law amendments being effective from 1st January 2022, all the companies Tax residents in the Republic should have in place a Cyprus Local File, in light of its intra-group financing or other transactions activities of a trading nature that are subject to Income Tax. (‘Controlled transactions’).

Local File shall be prepared by the deadline set in the law for filing the tax return of each year.

There are some exemptions for transactions that have or should have income subject to tax with total cumulative amounts of:

– Controlled financial transactions of less than €5m per year, or – Controlled transactions of less than €1m for other categories per year
Even though no Local file is required for the above exempted cases, the companies are obliged to carry out the below work:
• Brief description of the operations (Operations, assets, risks) (FAR)
• Description of the entity designation
• Justification of why the invoicing method chosen is the most appropriate.
• Benchmarking results from comparable data, or other models that can be used in certain cases as indicated by the OECD TPG

In fact, it is a shortcut of a normal TP study, though no automatic penalties are provided in the law for not having it in place at the specified deadlines set in the Law.

Scope of work
The Cyprus Local File/TP study will be comprised of, inter alia, a functional analysis documenting the economically significant activities, responsibilities and functions, the assets used, and the risks assumed by the parties involved in the transactions.

Gaining an understanding of the functional and risk profile of the parties involved in the transactions will provide the basis for finding comparable transactions on which a transfer pricing analysis can be based on.

The aforementioned analysis will provide the context in which to evaluate the comparability of controlled transactions undertaken by the company and similar transactions undertaken between third parties, i.e., uncontrolled transactions.

Accordingly, the study will analyze, and document the arm’s length nature of the remuneration earned and/or incurred by the company for such transactions.