Introduction of New Transfer Pricing Rules as of 1 January 2022

Overview

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 persons and Cyprus permanent establishments of non-Cyprus tax resident persons, engaging in transactions with related parties.

In addition, a formal Advance Pricing Agreement (“APA”) procedure has also been introduced.

The new legislation provides for specific penalties for non-compliance with the new obligations.

The law amendments and regulations are expected to be published in the Official Gazette of the Republic of Cyprus and are effective from the tax year 2022 onwards.

Income Tax Law Amendments

The Income Tax Law amendment states that the arm’s length principle (in accordance with Article 33 of the Law) maybe applied and interpreted in accordance with the TP Guidelines issued by the OECD (as amended from time to time).

Furthermore, the Income Tax Law amendment introduces new TP documentation compliance obligations and a formal procedure for obtaining an APA (details of which are provided in the relevant Regulations).

Definition of related party

The Income Tax Law has also been amended to update the definition of related parties and introduce a minimum 25% relationship threshold relevant for companies.

Two companies are considered as related if the same person (and its related persons) or group(s) of persons (under certain conditions) directly or indirectly:

• hold 25% of the voting rights or share capital of both companies, or
• have the right to at least 25% of both companies’ income.

A company is also considered related to a person (and its related persons) that directly or indirectly:

• hold 25% of its voting rights or share capital, or
• have the right to at least 25% of its income.

Two or more persons are considered related if they act together (or take directions) to directly or indirectly:

• hold 25% of the voting rights or share capital, or
• have the right to at least 25% of the profit of a company.

TP Documentation compliance obligations

As from the tax year 2022 onwards, Cyprus tax resident persons and Cyprus permanent establishments of non-Cyprus tax resident persons that engage in domestic and/or cross-border Controlled Transactions, subject to exemptions mentioned below, are required to prepare on an annual basis a TP Documentation File, which consists of the “Master File” and the “Cyprus Local File”.

The Cyprus Tax Authorities (“CTA”) is issuing a relevant announcement to clarify the required detailed contents of the Master File and Cyprus Local File.

The required contents of the Master File and Cyprus Local File closely follow the definition and suggested contents of Master File and Local File as per the OECD TP Guidelines and BEPS Action 13 Report.

As per the regulation, the following exemptions shall apply:

Master File

Only Cyprus tax resident entities that are the ultimate parent or surrogate parent entity of an MNE group falling under the scope of Country-by-Country reporting have an obligation to prepare and maintain a Master File. All other persons are exempt from this obligation.

 Local File

Persons that engage in Controlled Transactions with arm’s length value less than €750.000 p.a. in aggregate per transaction category (e.g. sale/purchase of goods, provision/receipt of services, financing transactions, receipt/payment of IP licencing/royalties, others) are exempt from the obligation to prepare a Cyprus Local File.

A person who holds a Practicing Certificate from the Institute of Certified Public Accountants of Cyprus (ICPAC) or another approved by the Council of Ministers body of certified auditors in Cyprus is expected to perform a Quality Review of the Cyprus Local File will be eligible to conduct a quality review.

The TP Documentation File should be maintained by the taxpayer in electronic or paper format and may be prepared in a generally acceptable language, preferably in English, even though the CTA may request its translation in Greek if necessary.

Relevant Deadlines

The TP Documentation File must be prepared and be subject to Quality Review (to the extent applicable as mentioned above) on an annual basis, by the deadline of filing the Income Tax Return for the relevant tax year.

The TP Documentation File needs to be retained in compliance with the general document retention obligations for tax purposes, but it should be submitted to the CTA upon request by the CTA (e.g. for the purpose of tax examination) and specifically within 60 days from the notification of such request.

The TP Documentation File must be updated on an annual basis and include details in respect of the impact of market fluctuations or other events on the information and analyses included therein.

Penalties shall be imposed for late or non-filing of the TP Documentation File.

Summary Table disclosure requirement

A Summary Table must be prepared by all taxpayers that engage in Controlled Transactions on an annual basis, disclosing details regarding such transactions, including the names and tax identification codes of the related counterparties and the respective values per transaction category (sale/purchase of goods, provision/receipt of services, financing transactions, receipt/payment of IP licences/royalties, others).

The Summary Table must be submitted electronically together with the Income Tax return for the relevant tax year.

Administrative Penalties for non-compliance with the new law amendments

In accordance with the amendment to the Assessment and Collection of Taxes Law, the following new administrative penalties are introduced:

• In the case of late submission of the TP Documentation File following the notification by the CTA to the taxpayer of a request for submission, the following penalties will apply:

• In the case of non-submission of the TP Documentation File following the notification by the CTA of a request for submission, a penalty of €20.000 will apply.
• In the case of non-submission of the Summary Table a penalty of €500 will apply.

Advance Pricing Agreement (“APA”) procedure

Cyprus tax resident persons and Cyprus permanent establishments of non-Cyprus tax resident persons may submit to the CTA an APA Request in respect to current or future domestic or cross border Controlled Transactions.

The detailed framework of the APA procedure and other relevant matters are described in the new Regulations.

In particular, the APA request may cover the various conditions and assumptions relevant for determining the arm’s length pricing of the Controlled Transactions for a specified period, including:

• the critical assumptions on the functional and risk profile of the parties involved,
• the relevant market conditions,
• the applicable TP method to be followed,
• the identified uncontrolled comparable transactions and any necessary adjustments made to determine the arm’s length price range,
• any other specialised matter in relation to the pricing of the Controlled Transactions.

The CTA examines the APA request and approves or rejects it.

In addition, the APA procedures provide for the following:

• The CTA should issue the APA decision within 10 months (the CTA may notify extension of this deadline up to 24 months) from the date of submission of the APA request by the taxpayer. Even though the APA decision may be applicable for a maximum term of four years, it cannot apply for any tax year prior to the tax year in which the request is submitted.

• The APA request for cross border Controlled Transactions may be bilateral or multilateral, involving the tax authorities in other jurisdiction(s) with which Cyprus has concluded a Double Tax Treaty. In such cases, a corresponding request needs to be filed by the taxpayer with the authorities in the other jurisdiction(s) and the CTA may consult in writing with such authorities under the relevant mutual agreement and exchange of information procedures and applicable EU legal framework, for the purpose of issuing the APA decision.

• The prices of the Controlled Transactions covered by an APA decision will be considered as arm’s length, provided that any conditions included in the APA decision are met, and that the critical assumptions on which the APA was based continue to be valid and applicable.

Even though an approved APA decision is considered binding, it can be revised during its agreed term upon request of the taxpayer or at the discretion of the CTA, only if:

• the critical assumptions on which the APA decision was based are proven incorrect; or
• the conditions or critical assumptions on which the APA decision was based have substantially changed so that it is impossible to apply the APA decision; or
• if an arbitration process is followed for transactions covered by the APA decision, under an effective Double Tax Treaty or the EU Arbitration Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises.

Revised APA decisions issued by the CTA shall apply for the remaining of the term of the original APA decision.

It is worth noting that the CTA may revoke an APA during its term (in which case the APA is considered as not issued) if it is established that:

• the critical assumptions on which the APA was based were incorrect due to misinterpretation of fault attributed to the taxpayer; or
• the taxpayer has failed to comply with one or more of the key terms and conditions included in the APA.

An APA may be cancelled by the CTA at any time during its term if it is established that:

• there is a significant change to the critical assumptions and conditions on which the APA was based; or
• the taxpayer has failed to comply with key terms of or obligations described in the APA; or
• there is a substantial change in the applicable tax provisions which significantly affect the APA.

An APA cannot be cancelled if it may be revised. However, when cancelled, the APA ceases to be in effect from the relevant date specified in the cancellation decision issued by the CTA.

This content is for general information purposes only and should not be used as a substitute for consultation with professional advisors.

How can Taxcom help you

The amendment on TP matters will affect most of the companies having presence in Cyprus that engage in transactions with related parties.

As from the tax year 2022, businesses should comply with the new rules affecting their operations and identify the TP implications and risks to which they may be exposed, in order to take any necessary steps for mitigating risks and ensuring compliance with the new requirements in the most efficient and effective way.

Taxcom comprises the appropriate resources and expertise and is ready to provide assistance and guidance to service providers and/or businesses to comply with the new TP rules.

Contact us at info@taxcom.cy