Transfer Pricing Study: The Cyprus framework


On 30 June 2017, the Cyprus Tax Authorities (‘’CTA’’) issued a Interpretative Circular 3 (“the Circular”) outlining the transfer pricing guidelines in respect of intra-group back to back loans, aiming to replace the minimum required profit margin that was applicable up to that date.

The Circular provides for the application of TP methodology to such activities based on the arm’s length principle as advocated by the OECD.

The Circular applies to intra-group financing activities where loans or cash advances are granted by a Cypriot tax resident company (or Cypriot permanent establishment of a non-resident company) to related parties, financed by financial means and instruments, such as debentures, private loans, cash advances, or bank loans.

The Circular sets out the requirements for a Transfer Pricing Analysis (“TP Study”) to be prepared for such activities. In addition, it provides for a simplification measure (effectively a safe harbour remuneration of 2% after-tax on assets) for companies that do not intend to undertake a TP Study. This simplification measure can be opted for cases where the relevant criteria are met and the company pursues a purely intermediary activity within the financing arrangements, borrowing from related parties and on-lending to related parties.

It worth noting that opting for the simplification measure is subject to exchange of information (under DAC6 reporting following the subsequent introduction of the relevant DAC6 provisions in Cyprus).

Frequently Asked Questions (FAQs) issued by the CTA

On 24 January 2022, the CTA uploaded a FAQs section on its website with respect to Transfer Pricing. The FAQs relate to the circular issued by the CTA in 2017 in respect of intra-group back to back financing activities.

The key points contained in the FAQs posted on the CTA website are summarised below:

  • Transfer Pricing documentation prepared is not filed with the CTA as part of the annual tax filing process but should only be submitted to the CTA upon request.
  • The TP expert who prepares the TP Study is someone who possesses sufficient practical experience, competence and technical knowledge to prepare a TP study in accordance with the OECD TP Guidelines and the provisions of the Cyprus Tax Legislation. A TP expert is qualified by sufficient evidence of his/her technical expertise, training and knowledge in TP matters.
  • If a company opts for the simplification measure (2% margin after tax) because it is functionally reduced as it is purely an intermediary financing entity should prepare a functional analysis only.
  • In case the company does not have a TP study in place (and does not come under the simplification measure), the CTA may assess the company’s taxable profits on the basis of the available information and at its own discretion.
  • A TP study should be prepared when an intra group loan is initiated and updated when:

(a) new loans are provided or received by the company, or

(b) significant terms of the existing loans change or amended, or

(c) the functional profile of the company changes, or

(d) the market and economic conditions change significantly (if applicable).

The above list is indicative, and it is not exhaustive.

  • “Specialised personnel” as mentioned in paragraph 19 of the Circular should have sufficient knowledge, possess competence and experience to perform decision making functions and to control the risks of a controlled transaction under consideration. Reference is made to relevant parts of the OECD TP Guidelines with respect to what is meant by “control over risk”.

It is clarified that there is no requirement for a company to hire specialised personnel provided that its board of directors has sufficient knowledge, possesses competence and experience to perform the decision-making functions and to control the risks of the transactions under consideration.

  • Contributions from shareholders who are physical persons fall within the scope of the Circular regardless of whether these are interest bearing or not, and are therefore considered as funding back-to-back financing arrangements. However, contributions which are considered equity do not fall under the definition of financial means and instruments as described in paragraph 2 of the Circular and thus do not fall within the scope of the Circular.
  • Paragraph 25 of the Circular states that in cases where the simplification measure is used, the minimum margin of 2% after tax is applied on the value of the company’s assets.

The term “company’s assets” is interpreted as the assets relating to the intra group back-to-back financing transactions (i.e. loan receivables) only. Moreover, the value of the loan receivables means their principal amount.

Accrued interest could also be included in the value of the company’s assets under specific facts and circumstances (e.g. if a loan agreement includes provisions for capitalisation of the interest or if as per the actual conduct of the parties accrued interest could be considered as additional financing).

  • A company that carries out back-to-back intra-group financing activities and also carries out other activities still falls within the scope of the provisions of the Circular in respect of its back-to-back financing transactions.
  • The Circular applies to both cross-border transactions and domestic transactions between related companies.


How can Taxcom help you

Taxcom can assist you with understanding the potential impact of the abovementioned FAQs relating to the Circular on their financing arrangements, and where appropriate assist with the preparation and submission of the relevant transfer pricing work and analysis.

We are also ready to support you in connection with other types of intra-group transactions in light of the international and local Transfer Pricing framework such as the updated version of the OECD Transfer Pricing Guidelines published on 20 January 2022.

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