On 30 June 2022, a package of measures containing comprehensive transfer pricing (“TP”) requirements for businesses has been voted into law by the Cyprus House of Representatives. The measures are in line with the recommendations of the Organisation for Economic Co-operation and Development (OECD) within the framework of Action 13 of the Base Erosion and Profit Shifting (BEPS) project. The new rules have been implemented via amendments to the Cyprus Income Tax Law (ITL) and the issuance of Regulations. The Assessment and Collection of Taxes Law has also been amended to introduce penalties for non-compliance with the new TP documentation requirements. The rules introduce new TP documentation requirements, subject to certain thresholds being exceeded. In addition, the legislation now also includes a framework for taxpayers to apply for Advance Pricing Agreements. The new requirements will be implemented for tax years starting from 1 January 2022 onwards.
Amendments to the Income Tax Law and issuance of Transfer Pricing Regulations
The provisions of Section 33 of the ITL have been amended to specify that the arm’s length principle should be applied and interpreted in accordance with the OECD Transfer Pricing Guidelines for MNEs and Tax Administrations.
Amendments have also been made to the definition of connected parties in Section 33(3) of the ITL, which introduces a 25% relationship test (see Appendix below for more details). Where taxpayers meet the conditions under this 25% relationship test, TP documentation requirements will arise assuming the relevant thresholds for the value of transactions with related parties (“controlled transactions”) have been exceeded (see below comments for further details).
The amendments to Section 33 also provide for
taxpayers to be able to apply for an Advance Pricing Agreement (APA) and the relevant details and process are set out in the Regulations that have been issued.
The new rules provide that Cyprus tax resident companies, as well as permanent establishments of non-resident companies, are obliged to maintain TP documentation supporting their controlled transactions with related parties as defined in Section 33(3) of the ITL.
The TP documentation will need to be maintained in the form of a Local File. In certain limited cases a Master File may also be required if the taxpayer is not exempt from this requirement (see below). Whilst the legislation provides for guidance to be issued by the tax authorities on the required contents of Local Files and Master Files, these are expected to be broadly aligned to the model contents in the BEPS Action 13 Report and the OECD Transfer Pricing Guidelines for MNEs and Tax Administrations.
Furthermore, the legislation provides for exemptions to these Local File and Master File requirements as follows:
- Taxpayers will be exempted from maintaining a Local File if the aggregated value of the controlled transactions per particular category (e.g. goods, services, IP related income, financial transactions) total (or should total based on the arm’s length principle) an amount which does not exceed €750.000 per tax year.
- A taxpayer which is not part of an MNE Group subject to Country-by- Country Reporting (CbCR), i.e. is not part of a group which has consolidated group revenues exceeding €750M, will not be required to maintain a Master File. Even where a taxpayer is a member of such an MNE group subject to CbCR, it will be exempted from the obligation to maintain a Master File if it is not the Ultimate Parent Entity (UPE) or the Surrogate Parent Entity (SPE) of the group for CbCR purposes.
Summary Information Table (SIT)
In addition, taxpayers will be required to complete a Summary Information Table (“SIT”) containing high level information on related party transactions, such as the identity of the counterparties, their jurisdiction of tax residency and the value of the transactions.
Reporting Deadlines and Record Keeping
The Regulations provide that the Local File (and Master File, if relevant) for a particular year should be prepared no later than the due date for submitting the taxpayer’s Income Tax Return for that year. Based on the current deadlines for filing corporate income tax returns, this would mean companies would have 15 months after the end of the tax year to put in place the Local File (and Master File, if relevant).
The SIT should be prepared for each separate tax year and be submitted to the Cyprus Tax Department (CTD), along with the taxpayer’s corporate income tax return for that tax year.
The Regulations also require that a person who holds a professional practicing certificate from the Institute of Certified Public Accountants of Cyprus, or from any other similar recognised body in the Republic, to undertake an assurance quality review of the Local File no later than the due date for submitting the taxpayer’s Income Tax Return for the year which the Local File relates to.
Upon request by the CTD the legislation stipulates that the Local File (and Master File if applicable) should be made available within 60 days from the receipt of the relevant request by the taxpayer or by a person authorised to act as a representative of the taxpayer.
Penalties for non-compliance
The amended Assessment and Collection of Taxes Law introduces penalties for non-compliance with the new Local File, Master File and SIT requirements as follows:
Failure to provide TP documentation upon request
Where a taxpayer has received a notice from the CTD to provide TP documentation (i.e. Local File, or Master File where applicable) and fails to do so within the required timeframe of 60 days, penalties of between €5.000 and €20.000 will apply depending on the length of the delay.
Non-submission of SIT
In cases where a taxpayer fails to submit a SIT, a penalty of €500 will be imposed.
Advance Pricing Agreements
The new legislation and regulations also put in place provisions whereby a taxpayer may apply for an Advance Pricing Agreement (APA) for transactions with related parties. An APA is an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria (e.g. method, comparables and appropriate adjustments thereto, critical assumptions as to future events) for the determination of the transfer pricing for those transactions over a fixed period of time.
According to the Regulations issued, the CTD will examine the application and reach a decision to be communicated to the taxpayer within 10 months from the date of the application. Notwithstanding this, by decision of the Commissioner of Taxation, a longer time period of up to 24 months may be set for the CTD to reply.
When the application for an APA will be on a bilateral basis and will involve consultations between the CTD and the authorities of other jurisdictions, with which a tax treaty exists, the Regulations state that the applicant will in parallel need to contact the tax authorities of the other jurisdictions involved and furnish such authorities with the same information.
The Regulations state that the validity of an APA may not exceed 4 years. Nevertheless, under certain circumstances, the APA can be revised, either following application by the taxpayer or at the sole discretion of the Commissioner of Taxation. In addition, the Regulations provide that the CTD has the authority to revoke or cancel an APA under certain circumstances.