The Cyprus Tax Office has introduced a new tax deduction scheme for Scientific Research and Research and Devel
The Cyprus Tax Office has introduced new Transfer Pricing Rules (TP) which are applicable as from 1st January 2022.
In general, the TP rules govern the allocation of revenue and/or expenses that result from intercompany transactions between companies or branches that belong to the same group or the same owners.
The major provisions of the rules are analysed as follows:
1. Which transactions
The TP rules apply to all types of transactions between related companies or branches that exceed the limit of €750.000 per type of transactions. Such transactions include:
Services
- Financial services
- Goods
- Intellectual Properties (licensing, disposals etc.)
- Other transactions
2. To whom it applies
The TP rules apply to all related party transactions entered by Cyprus resident companies or foreign entities operating through a permanent establishment in Cyprus. The definition of related parties includes companies or entities that have a direct or indirect relationship of at least 25% of the voting rights of the other entity.
3. Documents required
Entities that are liable to the provisions of the TP rules must prepare a TP documentation file, detailing all intercompany parties and transactions.
This file must contain the following:
a. Master file
b. Local file
c. Summary information table
3a. Master File
The Master File should include at least a detailed explanation of the group’s business activities and its internal TP policies. It should also explain the basis of allocation of the revenue and costs amongst the different related parties within the group.
The preparation of the Master file is obligatory in the case a Cyprus company acts as the Ultimate Parent Company of the Group and the group has a total revenue of €750 million.
The TP rules require an annual update of the Master File detailing any market or other economic changes that affect the group and its revenues.
3b. Local File
The Local File includes the related party transactions only of the entity that is resident in Cyprus. The Local file must analyse all the intra group transactions of the Cyprus entity and it should adequately explain that the Arm’s Length Principles were applied in all these transactions. Specific reference can be made to the Transfer Pricing Study to be prepared by the entity, which will explain the methodology used to determine the TP revenues and costs of the group.
The Local File must be prepared in case the total value of the transactions, per type of transaction, exceeds the limit of the €750.000. Again, it should be updated on an annual basis indicating any material changes in the economic and market conditions that may affect the group and its TP policies.
It is also equally important to understand that both the TP Study and the Local File can only be prepared and reviewed, by persons or entities who hold a professional practicing certificate from the Institute of Certified Public Accountants of Cyprus, or from another other similar recognised body in the Republic. Internally prepared files will not be accepted.
The Local File must be submitted to the tax office prior to the date of submitting its annual tax return. The final date to submit it is 15 months after the end of the relevant calendar year.
3c. Summary Information Table (SIT)
The SIT includes details of the related party transactions, the value of such transactions, details of the counterparties and their jurisdiction, and the type of intercompany transactions entered into.
The SIT can be submitted to the Tax Office together with the annual Income Tax Return.
4. Format
All the documents explained above can be presented to the tax office either in paper or electronic form.
5. Penalties
In case a Cyprus entity fails to provide the necessary documents within the time frame required the following penalties will apply:
- In case the relevant File is filed after the 60th day but before the 91st day from the notification of the submission request the penalty is €5.000.
- In case the relevant File is filed after the 90th day but before the 121st day from the notification of the submission request the penalty is €10.000.
- In case the relevant File is filed after the 120th day from the notification of the submission request the penalty is €20.000.
- For not submitting and SIT the penalty is €500.
6. Advance Pricing Agreements
An Advance Pricing Agreement (APA) is an arrangement that determines the methodology, the comparisons made and the key assumptions behind the transfer prices to be followed during intragroup transactions, prior to entering into these transactions.
The APA is submitted to the tax office for approval prior to the year that the transfer prices are to be effected. If approved by the tax office, the agreement will remain in force for the next four years.
