Transfer Pricing Updated in Cyprus
Cyprus was one of the last countries in the EU to implement transfer pricing rules. Before the enactment of this law, the legal basis to address transfer pricing issues rested on the arm’s length principle, as found in section 33 of the Income Tax law.On the 30h of June 2022, the Cyprus Parliament enacted a law introducing detailed transfer pricing legislation effective from 1 January 2022. The new law has incorporated the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TP Guidelines) in their entirety into the Cyprus Income Tax Law of 2002.
Applicability of New law.
According to the Cyprus law, the new transfer pricing rules apply to transactions between related parties (legal persons and individuals).
The new law provides detailed rules as to the meaning of the term “related parties” in an effort to capture different relations that there is a “control” situation. The main rule of the law is that when one legal entity participates in the share capital of another legal entity through the direct or indirect holding of share of at least 25% (25 per centum), the two parties are considered related parties.
It is to be noted that:
(a) Specific transfer pricing documentation is required subject to a small size exemption.
(b) As the law explicitly incorporates the OECD Guidelines, any transfer pricing study has to cross-reference the OECD Guidelines.
Obligations
The law provides for two types of requirements for tax residents in Cyprus. The first one is to submit a summary information table which includes intercompany transactions, general information about the group, the profile of the business and the transfer pricing method used. The second requirement is to prepare a transfer pricing study in order that it can justify compliance with the arm’s length principle subject to a small size exemption. The small size exemption applies when the controlled transactions cumulatively, per category, do not exceed the amount of €750,000 per tax year.
Transfer Pricing study
A key requirement of the law is to prepare a transfer pricing study. As the law explicitly incorporates the OECD Guidelines, any transfer pricing study has to cross-reference the OECD Guidelines, which currently are more than 700 pages long and updated regularly.
The OECD Guidelines in 2017 have been heavily amended as a result of the Base Erosion and Profit Shifting (BEPS) project. The OECD Guidelines articulate a nine-step process for undertaking a transfer pricing analysis. Key elements of an OECD transfer pricing study includes:
• Accurate delineation of the transaction (industry analysis and value chain analysis);
• Recognition of the transaction;
• Comparability analysis and functional analysis;
• Finding comparables;
Selection of the most appropriate transfer pricing method. Transfer pricing methods of the OECD TP Guidelines are: the comparable uncontrolled price method; the resale price method; the cost-plus method; the profit split method; and the transactional net margin method.
• Comparability adjustments;
• Arms-length range;
• Special rules in intangibles, risks allocation, profit splits and financial transactions.
5. Deadlines
The Transfer Pricing Study and the summary information table for a particular year should be prepared no later than the due date for submitting the taxpayer’s Income Tax Return for that year.
Advance Pricing Agreements
The new law provides specific provisions regarding Advance Pricing Agreements based on the arms-length principle.
Penalties
The new law makes provisions for specific penalties for non-compliance with the deadlines of submission of the stipulated reports and documents. In the event of late submission of the summary information table a €500 (five hundred Euro) fine is imposed. Additionally in the event that the documentation is not made available to the Tax Commissioner within sixty days from the notification of a request, a fine of €5,000 is imposed, and if it is not submitted from the sixty-first day until the ninetieth day a fine €10,000 is imposed. Finally if it is not made available at all or made available after the ninetieth day a fine equal to €20,000 is imposed.