New Transfer Pricing Rules in Cyprus: Global Transparency and New Challenges
13 November, 2024
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In up-to-date globalized world, transfer pricing issues have become increasingly important for multinational companies and tax administrations. Given the need to increase transparency in financial transactions and fair distribution of income between jurisdictions, governments of many countries, including Cyprus, are actively improving the legislative framework in this area.
Transfer pricing is the process of setting prices for goods or services between related companies registered in different jurisdictions. It is an important aspect of international business aimed at setting prices that would be fair if the companies were independent and had no mutual influence on each other.
The main goal of transfer pricing is to avoid price manipulation in order to reduce tax payments.
New transfer pricing rules, approved by the Parliament of Cyprus on June 30, 2022, are a vivid example of such efforts. Such rules, developed in accordance with the Organization for Economic Cooperation and Development, fix clear requirements for documentation and controlled transactions and are intended to increase tax transparency and prevent tax evasion.
Scope: Who is in the game?
The obligation to comply with the new transfer pricing rules falls on both Cypriot resident companies and permanent representative offices of foreign companies registered in Cyprus and carrying out transactions with related parties.
New rules cover various types of intra-group transactions, including:
1. Sale and purchase of goods: fixing fair prices for goods exchanged between related parties.
2. Rendering and receiving services: assessment of prices for services provided or received between related companies.
3. Intellectual property transactions: facilitating fair conditions for use and transfer of intellectual property rights within a corporate group.
4. Financial services: evaluation of loan facilities, loans, and other financial transactions between related parties.
5. Other types of transactions: any other agreements or exchanges between related parties that affect profit and tax liabilities.
Related Party Threshold: Interests That Matter
The new law fixes a 25% threshold for determining a related party. Under this threshold, a company shall be treated as related to another one if at least one of the following conditions is met:
- The same person directly or indirectly owns 25% or more of share capital in both companies.
- The same person and persons related thereto directly or indirectly own 25% or more of share capital in both companies.
- A group of two or more persons directly or indirectly owns 25% or more of share capital or is entitled to at least 25% of each company’s income, provided that such group consists of the same persons or can be treated as consisting of the same persons by replacing one member of the group with a person related thereto.
If you recognize yourself – let us move on!
Basic requirements for documentation in detail
Depending on series of criteria listed below, two types of reports can be drafted: a full report (Master File) and a shortened report (Local File).
Both types of documentation should be provided to the tax authorities within 60 days from the moment of an official request. Annual updating of reporting is necessary to secure compliance with tax legislation and international standards.
Let us highlight each of them in detail.
Master File
If you are a large corporation and a resident of Cyprus, belonging to an international group of companies with a consolidated income exceeding €750 million, or the parent company of such a group, you shall be obliged to draft a full report, namely Master File.
Master File should be drafted before the deadline for filing income tax return. Why? The tax return has an appropriate section that should be filled-in for reporting on transfer pricing. Leaving the section blank may cause initiation of a detailed tax audit.
Furthermore, it should be noted that the report on transfer pricing affects the tax base for a given tax year. Since the report is aimed at compliance with market conditions, depending on terms of transactions between related parties, an appropriate adjustment to income tax may be calculated and the corresponding amount will be added to the company’s tax base.
Master File contains detailed information about structure of the group of companies, its business operations, risk management strategies and other key aspects that affect transfer pricing.
Local File
It is clearer with an abbreviated report, because Local File is an analogue of the Ukrainian transfer pricing documentation. Taxpayers shall draft such type of document only for controlled transactions with related parties exceeding the new thresholds, starting from February 1, 2024:
- €5,000,000 for financial transactions between related parties (e.g., loans).
- €1,000,000 for the remaining categories of transactions between related parties (trade in goods, services, intellectual property, and others).
Local File is focused on specific transactions between related companies carried out in Cyprus. It includes detailed information on terms and agreements between the entities, as well as justification of pricing strategies and methods used to determine prices.
In case of an abbreviated report, rules of the game remain unchanged. It should also be drafted before the deadline for filing the income tax return for the reasons stated above.
Summary of Information Table (SIT)
In addition, a separate file should be drafted, namely Summary of Information Table (hereinafter referred to as SIT), i.e., a document that contains data about transactions between related parties.
The table is now available for submission from May 27, 2024, via the Tax For All (TFA) portal. The deadline for submitting SIT for 2022 has been extended till November 30, 2024.
According to the Regulation, SIT shall be submitted by taxpayers jointly with the Main Tax Return (TD4) for all intra-group transactions, regardless of their volume.
SIT includes, in particular, information about counterparties, transaction category, scope of transactions by category, as well as business profile, applicable transfer pricing method and general information about the group.
And now, the main attraction: sanctions for violations
The new rules provide for quite significant fines for non-compliance:
- Fine for failure to submit the table of summarized information by fixed deadline makes up €500.
- Transfer pricing documentation should be submitted to tax authorities upon request within 60 days. If the documents are submitted after the 60-day deadline, the following penalties shall apply:
- Submission on days 61-90: a fine equal to €5,000.
- Submission on days 91-120: a fine equal to €10,000.
- Submission after 120 days: a fine equal to €20,000.
These are frustrating values. But such approach is aimed to secure timeliness and accuracy of submitting the required documentation.
What’s next?
Interlegal knows for sure that drafting transfer pricing documentation requires detailed analysis and understanding both international standards and local requirements. This is a complex process that requires a professional approach and accuracy.
Although the report on transfer pricing should be submitted within 60 days from the moment of receiving a request from tax authorities, it is important to fill-in the section indicating the date of signing this report when submitting the company’s annual tax return. Blank section may attract the attention of tax authorities, which may increase the need for a more detailed audit and, accordingly, additional time and resources spent. Therefore, we recommend you always to get ready for tax authorities’ requests and to submit all necessary documentation in a due time.
Interlegal experts have vast knowledge and experience in international tax law and are always ready to help you in facilitating compliance of your business with new requirements and international standards.
