The new tax treatment is applicable for companies which meet the following criteria:
- Carry out Intra- group financing transactions.
- Are Cyprus tax resident companies or are non-Cypriot tax resident companies which have a permanent establishment in Cyprus and the financing activities are attributable to the permanent establishment.
The term “intra-group financing transaction” refers to any activity consisting of granting of loans or cash advances remunerated by interest (or which should be remunerated by interest) to related companies, financed by financial means and instruments, such as debentures, private loans, cash advances and bank loans.
1. Application of arm’s length principle to intra group financing transactions
It is necessary to determine for each intra-group financing transaction conducted, same as with all types of intra-group transactions, whether the agreed remuneration complies with the arm's length principle (as set out in Article 9 of the OECD Model Tax Convention on Income and on Capital) i.e. whether it corresponds to the price which would have been accepted by independent entities in comparable circumstances, taking into account the economic nature of the transaction.
2. Comparability Analysis (transfer pricing study)
An appropriate comparability analysis (transfer pricing report) must be carried out in order to determine whether transactions between independent entities are comparable to transactions between related entities. The comparability analysis should consist of two parts:
- Identification of commercial or financial relationship between related entities and determination of the conditions and economically relevant circumstances attaching to those relations.
- Comparison of the as accurately delineated conditions and economically relevant circumstances of the controlled transaction with those of comparable transactions between independent entities.
3. Substance requirements
In order to justify the risk control and to further validate that the management and control are exercised in Cyprus it is imperative that the group financing company must have an actual presence in Cyprus. In this regard the following will be taken into account:
- the number of the members of the board of directors who are tax resident of Cyprus
- the number of meetings of the board of directors taking place in Cyprus and
- the availability of qualified personnel to control the transactions performed. Nonetheless the group financing company may subcontract functions which do not have a significant impact on risk control.
4. Simplification measures
When a Cypriot tax resident group financing company pursues a purely intermediary activity, grants loans or advances to related companies, which are refinanced by loans or advances obtained from related companies, it is considered that for sake of simplification, the transactions are deemed to comply with the arm’s length principle, if the company receives a minimum after tax return of 2% on the assets. This percentage will be regularly reviewed by the Tax Department, based on relevant market analyses. In such case no transfer pricing study will be required.
In order to benefit from this simplification measure, entities should:
- satisfy the minimum substance requirements mentioned in section 3
- communicate to the Tax department the use of the simplification procedure, by completing the relevant field in the tax return of the corresponding fiscal year.
It should be noted that:
- any deviation from the minimum return of 2% is not allowed unless in exceptional cases it is duly justified by an appropriate transfer pricing analysis.
- this minimum return percentage cannot be used, without a transfer pricing analysis, to determine arm's length remuneration for intra-group financing transactions different from those covered by the circular.
5. Minimum requirements for transfer pricing analysis
The minimum requirements for the transfer pricing analysis are those that are set out in paragraph 29 of the relevant circular.
The Transfer Pricing Analysis should be prepared by a Transfer Pricing Expert.
It must be submitted to the Cyprus Tax Department by a person who has licence to act as auditor of a company in Cyprus, who is required to carry an assurance control of the transfer pricing analysis.
6. Exchange of information
The issuance of tax rulings (including rulings related to simplification measures) or Advanced Pricing Arrangements, as well as the use by a taxpayer of the simplification measures, whether applied following the issuance of a ruling or not, are subject to the exchange of information rules set under the Directive on Administrative Cooperation (Council Directive (EU) 2011/16 as amended by Council Directive Council Directive (EU) 2015/2376).
7. Entering into force of the circular
The new circular applies with effect as from 1 July 2017, for existing and future transactions, irrespective of the date of entering into the relevant transactions and irrespective any tax rulings issued prior to the said date.
Any tax rulings issued prior to 1 July 2017 on transactions within the scope of the relevant circular will no longer be valid for tax periods as from 1 July 2017.
If the intra - group financing transactions effected prior to 1 July 2017 are still ongoing post the reference date and they were supported by a transfer pricing study, the said transfer pricing study will need to comply with the provisions of the relevant circular, which will be verified by the Tax Commissioner.
The circular can be downloaded from our web site.
Download Revenue Circular