TRANSFER PRICING RULES
The Arm's Length Principal
According to Article 33 of the Income Tax Law, if:
I. A company in the Republic is directly or indirectly involved in the management or control
or capital of another company; or
II. When the same persons are directly or indirectly involved in the management, control, or
capital of two or more Companies,
they are considered related parties and any transactions between them should be at arm’s length.
An individual is considered a related party with another individual if:
I. the first individual is the spouse or relative of the second individual, or the spouse of a relative
of the second individual, or relative of the husband or wife of the second individual.
II. the individual is in partnership, with the husband or wife or relative of the other individual
with whom he is in partnership.
For legal persons, a company is connected to another company:
I. If the same person controls directly or indirectly at least 25% of the voting rights or share
capital or has right to a share of at least 25% of the profits of both companies;
II. If the same person and persons connected with that person control directly or indirectly at
least 25% of the voting rights or share capital or has right to a share of at least 25% of the
profits of both companies;
III. If a group of two (2) or more persons control directly or indirectly at least 25% of the voting rights or share capital or has right to a share of at least 25% of the profits of each company, and the groups consist of the same persons or could have been considered to consist of the same persons considering in one or more cases, one member of either the first or the second group to be replaced by another person with which this person is connected.
A company is connected to a person if:
I. that person controls directly or indirectly at least 25% of the voting rights or share capital or has right to a share of at least 25% of the profits of this company or that person and other persons connected to that person control directly or indirectly at least 25% of the voting rights or share capital or has right to a share of at least 25% of the profits of this company.
II. Two or more persons acting together to secure dire directly or indirectly at least 25% of
the voting rights or share capital or has right to a share of at least 25% of the profits of this company.
III. Two or more persons acting together to secure directly or indirectly at least 25% of the voting rights or share capital or has right to a share of at least 25% of the profits of a company shall be treated in relation to that company as connected with each other and with any person that acts on the directions of any of them to secure directly or indirectly at least 25% of the voting rights or share capital or has right to a share of at least 25% of the profits of a company.
TRANSFER PRICING COMPLIANCE RULES
Intragroup transactions are defined as the transactions conducted between related parties, otherwise referred to as the obliged entities.
According to the law, intragroup transactions performed between companies that are resident in the Republic and /or of foreign companies which have permanent establishment in the Republic must be recorded and documentation files must be maintained, which must contain inter alia, a summary table of all intracompany group transactions. (“The Master File”).
The summary table should be submitted to the tax authorities together with the tax return for a given year.
The Master File should be updated each tax year and completed within 12 months from the
end of the tax year in which the requirement has applied.
The Master File should be maintained in Cyprus for six years and must be provided to the Tax
authorities within 60 days from the date that relevant request has been received by the company or
any other company that is authorised by the company to act as its representative.
The Commissioner of Tax has the authority to issue guidelines as to the requirements of the documentation file and the summary table, the acceptable transfer pricing methods, and the methods of establishing the interquartile range or the profit margin.
EXEMPTIONS OF COMPLIANCE WITH THE TRANSFER PRICING RULES:
I. The obliged entities with accumulated intragroup transactions per category, equal or below the amount of €750.000 per tax year, based on the arm’s length principle, are exempt from the obligation to maintain the Cyprus Local File.
II. Such companies, exempt from the obligation to maintain a Master file, provided that they are not the Ultimate Parent Company or Surrogate Parent Entity as defined in the Law on administrative cooperation in the field of taxation.
III. The Companies listed above are also exempted from the obligation to submit the summary table.
ADVANCED PRICING ARRANGEMENT (“APA”)
An APA is an agreement between an entity and the tax authorities in which the tax payer requests the confirmation of the tax authorities on pricing specific future or existing cross-border transactions with related parties to be considered at arm’s length.
The objective of the APA is to establish an appropriate set of criteria which will be used to set the prices of intragroup transactions applicable for a specific period. The APA will be examined by the Commissioner of Taxation who will decide whether to accept or reject it. The decision should be communicated to the entity within 10 months (up to 24 months provided that the taxpayer has been notified) from the date of submission of the APA.
An APA is applicable for a maximum period of 4 years but is not applicable to a tax year that has lapsed before the time of submission of the APA.
Where the APA includes a request of consultation with the tax authorities of other states with which
Cyprus has a Double Tax Treaty in place (bilateral or multilateral APA), the taxpayer must submit the
same request with all the supporting documents to the foreign tax authorities as well. In this case, the Commissioner of Taxation may hold consultations with the foreign tax authorities using the Mutual Agreements Procedures (MAP) provided in the Double Tax Treaty concluded between the contracting states.
An entity may be eligible to submit an APA to the Cyprus tax authorities, provided that:
1. It is a resident in the Republic;
2. Has permanent establishment situated in the Republic, owed by companies’ resident
outside the Republic
The APA may be recalled by the Commissioner of Taxation during the period in which is active:
a) If it is found that the facts and critical assumptions on which the APA is based are
inadequate, due to false interpretation or defects for which the taxpayer is responsible;
b) If it is found that the taxpayer has not complied with substantive conditions or obligations as set out in the APA;
In the event that the APA is recalled, it is considered as never been issued.
The APA may be cancelled by the Commissioner of Taxation during the period in which it applies:
a. If it is found that there has been a substantial change of the critical assumptions or
conditions on which the APA was based;
b. If it is found that the taxpayer has not complied with substantive conditions or obligations
as set out in the APA;
c. If there is a substantial change in the tax provision which substantially affect the APA.
The Commissioner of Taxation is not allowed to cancel the APA, if it is possible to revise it. However, where the APA has been cancelled, the validity of the APA ceases from the date indicated in the decision of cancellation document.
CONSEQUENCES OF NON-COMPLIANCE
Non-compliance with the reporting requirements by obliged entails heavy monetary penalties
MOVING FORWARD
To be compliant with the provisions of the new legislation a company shall:
I. Evaluate all its intragroup transaction and the need to maintain documentation file
II. Evaluate existing transfer pricing policy and support it with evidence