TRANSFER PRICING REGULATIONS IN CYPRUS

TRANSFER PRICING REGULATIONS IN CYPRUS

In response to global initiatives such as the Base Erosion and Profit Shifting (BEPS) program, Cyprus has recently enacted comprehensive legislation on Transfer Pricing. The primary objective of this legislation is to align transfer pricing outcomes with value creation, in line with action points 8-10 of the BEPS initiative. This article provides an overview of the key provisions in the new transfer pricing legislation, shedding light on who is obligated to comply, what needs to be reported, and the repercussions for non-compliance.

WHO IS DEFINED A RELATED PARTY?

The determination of related parties is crucial for assessing transactions that fall under the Transfer Pricing regulations. According to Cyprus' Income Tax Law, Article 33, entities are considered related parties if they are directly or indirectly involved in the management, control, or capital of another entity. This includes scenarios where the same individuals are involved in the management, control, or capital of two or more companies.

Individuals are also considered related parties if there is a family or partnership relationship as defined by specific criteria. The legislation aligns with the OECD Transfer Pricing Guidelines, ensuring a standardized approach to related party classification.

TRANSFER PRICING COMPLIANCE RULES & EXEMPTIONS

Intragroup transactions, defined as transactions between related parties, trigger compliance obligations. Companies resident in Cyprus and permanent establishments of foreign companies within the jurisdiction are required to maintain a documentation file for these transactions.

The documentation file comprises a Master file, a Cyprus Local file, and a summary table of transactions. The summary table must be submitted to the tax authorities along with the annual tax return, and the Cyprus Local file must be reviewed by the company's auditor for quality assurance.

Exemptions exist for companies with accumulated intragroup transactions below €750,000 per tax year, provided they adhere to the arm's length principle. Such companies are not obliged to maintain the Cyprus Local file or submit the summary table.

ADVANCED PRICING ARRANGEMENT ("APA")

The legislation introduces Advanced Pricing Arrangements (APA), allowing taxpayers to seek approval from tax authorities for the methodology used in pricing specific cross-border transactions with related parties. To be eligible for an APA, companies must be residents in Cyprus or have a permanent establishment within the jurisdiction.

The APA aims to establish criteria for pricing intragroup transactions, including the method used, comparable data, critical assumptions, and other relevant factors. The Commissioner of Taxation reviews and decides on the acceptance or rejection of the APA within a specified timeframe.

NON-COMPLIANCE

Non-compliance with reporting requirements attracts penalties, ranging from €500 for failure to submit a summary table to €20,000 for late or incomplete provision of the documentation file. These penalties underscore the importance of timely and accurate compliance with transfer pricing regulations.

To ensure compliance with the new transfer pricing legislation, companies in Cyprus are advised to evaluate all intragroup transactions, review existing transfer pricing policies, and maintain proper documentation files.

Our firm is well-equipped to assist companies in Cyprus with various aspects of transfer pricing compliance, including:

• Reviewing transaction pricing to identify those requiring transfer pricing studies.
• Conducting transfer pricing studies to determine arm's length prices.
• Assisting in the maintenance of documentation files.
• Facilitating the preparation and submission of APAs.
• Supporting the establishment of internal transfer pricing policies.
• Representing clients in transfer pricing disputes with tax authorities.

DISCLAIMER

This article serves as a general guide and is intended for informational purposes only. It is not a substitute for professional advice, and individuals or entities should seek independent advice based on the specific facts of their case. The authors and publishers bear no responsibility for any loss arising from actions taken or refrained from based on the information provided in this article.