10 July 2023
On 6 July 2023, the Commissioner of Tax issued circular 6/2023 providing clarifications and guidance on the applicability of the Transfer Pricing (TP) Legislation effective as of 1 January 2022, on categories of transactions which do not exceed the threshold of €750.000, and thus do not create the obligation for the preparation of a Cyprus Local File.
The circular provides guidance on the minimum requirements and the approach to be applied for documenting these transactions, along with the pricing methods to be applied. In short, the taxpayer will have the option to proceed with a “simplified” transfer pricing study for such transactions/ categories of transactions or in specific cases, apply simplification measures.
A. The simplified TP study should include the following sections:
- Short functional and risk analysis.
- Entity characterization.
- Method of documentation selected and basis of selection.
- Economic analysis with comparability search results based on OECD guidelines.
B. With regards to the simplification measures these are applicable in the following cases:
- Financing arrangements with related parties involving borrowings (e.g., back-to-back loans).
- Financing arrangements to related parties financed out of equity.
- Financing obligations/ arrangements of which the funds are used in the business.
- Low value-added services.
C. The application of the simplification measures will require the following:
- Preparation of documentation as per A1 and A2 above.
- For back-to-back loans the required net return (before tax) has been set at 2,5% on the average principal of the loan receivable during the year, including any accrued interest.
- For loans/ arrangements financed out of equity/ own funds, the minimum return has been set as being equal to the 10-year government bond yield of the country of residence of the borrower plus 3,5% (before taxes). The return is calculated based on the average principal of the loan receivable during the year, including any accrued interest.
- For financing arrangements in which the Cypriot entity is the borrower, and the funds have been used for business purposes, the maximum allowable borrowing cost will be calculated based on the 10-year government bond yield of Cyprus of the tax year under consideration, plus 1,5% (before taxes). The calculation will be based on the average principal of the loans during the year (plus any accrued interest).
- For low value-added services, as these are defined in the circular and the TP guidelines as issued by OECD, a minimum return of Cost-Plus 5% will be accepted in the cases where the Cypriot entity is the provider of the services. In the cases where the Cypriot entity is the receiver of the services, then the Cost-Plus 5% will be the maximum expense to be allowed.
For transactions falling under C2, C3, C4 and C5 there are also minimum requirements with regards to the documentation/ analysis that needs to be prepared to support the application of the relevant simplification provisions.
We remain at your disposal for any further clarifications that may be needed.
