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Transfer pricing

New transfer pricing legislation in Cyprus:

On 30 June 2022 and with effect from 1 January 2022, the Cyprus parliament has voted into law the long-anticipated documentation requirements on transfer pricing (law and regulations). The law and regulations are aligned with the recommendations set forth in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The transfer pricing documentation requirements apply to Cypriot tax resident persons and Permanent Establishments (PE’s) of non-tax resident entities for certain transactions with their related parties. The aim of the new law and regulations is to ensure compliance of covered entities with the arm’s length principle.

Transactions covered:

The transfer pricing law and regulations cover all types of transactions between related parties (if in excess of €750,000 per category of transactions), such as: Purchase & Sale of goods, Provision and Receipt of Services, Licensing (royalty) and sale or purchase of Intellectual Property, Provision and Receipt of financial services, other types of transactions.

Reporting requirements:

The law and the regulations introduce the obligation to prepare the documentation file (master file and     local file) and the table of summarized information (TSI).

The TSI for a tax year concerned should be prepared and submitted to the Cyprus Tax Department by all taxpayers involved in controlled transactions by the corresponding due date of the corporate income tax return.

The local file for a tax year concerned should be prepared by all taxpayers involved in controlled transactions by the corresponding due date of the corporate income tax return. Exception is granted if the volume of controlled transactions does not exceed €750,000 per category of transactions.

The master file for a tax year concerned should be prepared by the corresponding due date of the corporate income tax return. It applies to companies that are ultimate or surrogate parent entities of multinational groups with annual consolidated turnover over €750 million.

Responsibility of a taxpayer:

Taxpayers that are engaged in controlled transactions are obliged to prepare the required files according to the conditions described above.

In case of late submission or non-submission of files, the law and regulations prescribe the following penalties:

• €20,000 Maximum penalty for non-submission or late submission of master or local file
• €500 Penalty for non-submission or late submission of TSI.

Penalty varies for different files and also depends on the delay in filing.

Introduction of 25% relationship or connection threshold

Section 33 of the Income Tax Law is amended to introduce, among others, a percentage (%) in defining the relationship/connection of a Cypriot company with another person for transfer pricing purposes.

Following the above amendments, a company is connected with another company under the following conditions:

• If the same person has, directly or indirectly, at least 25% of the voting rights or of the share capital or is entitled to at least 25% share of the income of both companies.
• If the same person and persons connected with that person holds, directly or indirectly, at least 25% of the voting rights or of the share capital or are entitled to at least 25% share of the income of both companies.
• If a group of two or more persons holds, directly or indirectly, at least 25% of the voting rights or of the share capital or are entitled to at least 25% share of the income of each company and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person with whom that person is connected.

Moreover, a company is connected with another person if this person holds, directly/indirectly, at least 25% of the voting rights or of the share capital or is entitled to at least 25% share of the company’s income or if that person and persons connected with him together holds, directly/indirectly, at least 25% of the voting rights or of the share capital or are entitled to at least 25% share of the company’s income.

Finally, any two or more people acting together to secure, directly/indirectly, at least 25% of the voting rights or of the share capital or are entitled to at least 25% share of the company’s income shall be treated in relation to that company as connected with one another and with any person acting on the directions of any of them to secure directly/indirectly at least 25% of the voting rights or of the share capital or is entitled to at least 25% share of the company’s income.

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