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Tax Newsletter: Termination of application of minimum profit margins for back to back financing arrangements

15 March 2017

Recently the Cyprus Tax Authority has circulated an informative letter to professional bodies in Cyprus (including the Institute of Certified Public Accountants of Cyprus - ICPAC) stating its intention to terminate as from 1st of July 2017 the application of the minimum profit margins on qualifying back to back financing arrangements between related parties which were agreed and applicable as from 2011.

The above decision was taken by the Tax Authority due to the recent international tax developments and guidelines set by the OECD and G20 initiatives and the relevant BEPS (Base Erosion and Profit Shifting) proposals as well as the context of the Code of Conduct for business taxation and the EU State Aid perspective. 

As such as from 1st of July 2017 all tax rulings issued before by the Cyprus Tax Authority confirming the applicability of the back to back minimum profit margins on financing arrangements will cease to be effective.  The spread on intra-group back to back financing arrangements should be supported by Transfer Pricing studies based on the OECD guidelines and should be on arms length principals. 

Although transfer pricing rules have not yet been issued by the Cyprus Tax Authority nor have they been incorporated into Cyprus tax legislation, it is expected that they shall follow the relevant OECD transfer pricing guidelines. The Cyprus Tax Authority has stated its intention to introduce detailed transfer pricing legislation at least for intra group financing activities and we expect it to issue more specific guidance in due course. 

In light of the above developments, intra-group financing arrangements should be carefully reviewed and any corrective action to be taken where necessary. New financing arrangements should be supported by appropriate transfer pricing studies.  

Also worth considering is the notional interest deduction provided on new capital introduced to a Cyprus company which allows up to 80% of interest income received from financing activities to be deducted from taxable income.  Carefully structured, it provides a favourable alternative to back to back financing arrangements. 

How can BDO Help

  • Tax efficient structuring of new financing structures
  • Review of current structures from a financing point of view
  • Identify possibilities of efficient debt restructuring   
  • Assistance in preparing transfer pricing documentation


This tax publication has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained herein without obtaining specific professional advice. Please contact BDO Ltd to discuss these matters in the context of your particular circumstances. BDO Ltd, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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