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:
(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.
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.
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).
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.
Contact us at email@example.com