Transfer pricing circular: Simplified measures for low value transactions

OverviewTransfer pricing circular

On 6 July 2023 a new circular was issued by the Tax Commissioner providing further guidance on the applicability of Transfer Pricing (TP) Legislation effective as of 1 January 2022. The clarifying circular specifies the ‘simplification measures’ on categories of controlled transactions that are exempted from the obligation to be documented in a Cyprus Local File.

Therefore, Cyprus companies whose related party transactions do not exceed €750.000 per annum (per category of transactions) should provide a minimum content of Transfer Pricing documentation.

Simplified documentation requirements

The relevant taxpayer with controlled transactions falling under the circular should prepare a simplified TP study, the minimum content of which shall include the following:

  • Brief functional and risk analysis (functions performed, assets used, risks assumed)
  • Entity characterization based on the functional analysis
  • Basis for selecting of the most appropriate TP method
  • Economic/benchmarking analysis with reference to the OECD guidelines.

Simplified Pricing methods on particular controlled transactions

Taxpayers can opt to use safe harbour rules and be exempted from providing documentation under ‘’3’’ and ‘’4’’ above. However, in such a case they are required to provide certain additional documentation depending on the category of transaction.

Controlled Transactions

Safe harbour rule

Back-to-back financing arrangements

2.5% minimum (net) return before tax which is calculated on the average principal of the loan receivable during the year including accrued interest

Loans or cash advances to related parties, financed out of own funds (capital/retained earnings)

Yield of 10-year government bond of the borrower’s country of residence (as at 31 December of the preceding year) + 3.5% (before tax) which is calculated based on the average principal of the receivable loan during the year including accrued interest

Loans payable to related parties, to the extent that interest expense stemming therefrom has been used for business purposes

Cap on cost of borrowings (interest expense) at 10-year government bond of Cyprus (as at 31 December of the preceding year) + 1.5% (before tax) which is calculated on the average principal of the loans during the year including accrued interest

Low value-adding services as defined by OECD

5% profit mark-up on costs will be accepted in the cases where the Cypriot entity is the provider of the services. Where the Cypriot entity is the recipient of the service, the 5% profit mark-up will be the maximum allowable expense.

Mandatory and reporting disclosure requirements

The simplified Transfer Pricing documentation for related party transactions covered by the circular should be:

  • made available to the Tax Commissioner within 60 days from the date of his request. The documentation can either be provided by the taxpayer or by a person authorized to act as a representative of the taxpayer, and
  • subject to the DAC6 reporting provisions under hallmark E1 in case a taxpayer opts to make use  of the safe harbour rules.

The circular states that the use of the 5% mark-up on relevant costs for low value-adding services maybe exempted from DAC6 reporting if the taxpayer fully complies with the OECD TP Guidance on how to apply the relevant methodology.

How can Taxcom help you

Taxcom is ready to review cases which are affected by the circular and provide assistance and guidance to comply with the guidance issued by the Cyprus Tax Authorities.

Contact us at info@taxcom.cy