Cyprus has not included detailed TP legislation in its Income Tax Act
While many EU countries have already incorporated and are applying the OECD Transfer Pricing Directives in their national legislation, Cyprus will be the last country to incorporate Transfer Pricing (TP) laws into its income tax law.
To date, Cyprus has not included detailed TP legislation in its income tax law. In 2002, Cypriot legislation was changed to include a specific market conditions provision, although there are no guidelines for its application.
In 2017, the Cypriot tax authorities issued a detailed TP circular based on the OECD Transfer Pricing Guidelines and regulating (only) financial arrangements such as loan facilities.
In particular, Article 33 of the Income Tax Law (ITL) (applicable Law 31 (I) / 2021) provides a detailed definition of associates. Two companies are considered to be related if:
- A company participates directly or indirectly in the administration or control or in the share capital of another company. or
- The same persons (individuals) or legal persons participate directly or indirectly in the administration or control or in the share capital of another company.
Please note that two companies can be considered related even if they are both controlled by spouses or close relatives. Therefore, the Cyprus ITL provides a comprehensive definition of the associates that may be covered by the TP regulations.
In addition, the ITL contains and develops the transfer pricing guidelines of the OECD with regard to the arm’s length principle, so that taxable profits can be adjusted if the controlled prices differ from those agreed for comparable uncontrolled transactions.
Article 33 adopts the policy statement on Article 9 of the OECD Model Tax Convention on Income and Capital.
The ITL authorizes the tax auditor to revise the profits made by a CY company upwards or to establish a foreign company in Cyprus on a permanent basis if the arm’s length principle is not adhered to. In the same context, the other party involved in the transaction is entitled to recognition of an equal deduction, which affects its taxable profits accordingly.
When both CY companies are profitable, such adjustments usually do not affect a group’s tax burden. In the case of at least one loss-making company, however, such an adjustment can lead to higher taxable income and a change in the group’s tax due.
Tax treatment is more complicated when there are cross-border intra-group transactions. Keep in mind that a Cypriot company is a subsidiary of a UK company. The controlled transactions are also subject to the double taxation treaty between Cyprus and the United Kingdom, which contains TP provisions and regulates precisely this framework.
In this case, the difference between corporate tax rates (UK: 19%, Cyprus: 12.5%) could lead to a shift in profits to the Cypriot subsidiary in order to achieve a lower tax burden at group level. However, the tax auditor would not make a profit adjustment as virtually all taxes are payable in the Republic of Cyprus. However, if a Cypriot company is affiliated with a company registered in a tax-exempt jurisdiction, implementing aggressive tax planning would shift profits outside of Cyprus.
Upon a tax audit, the Cypriot Tax Authority will upward revise the taxable profit of the Cyprus resident company. Indeed, there will be a relevant tax burden at group level as there is no tax to be offset by the company registered in this tax-free jurisdiction.
In addition, Article 33A was introduced in 2019, which stipulates the TP adjustments. It prohibits any deduction of Cypriot tax resulting from an agreement or series of agreements that have been made for the purpose of eliminating the tax base and which are aimed at the acquisition of a tax advantage.
Article 33A can be useful in practice for an intra-group transaction that appears to be on market terms but which in fact has no business and commercial status.
In 2017, the Cypriot tax authority published a TP circular on intercompany financial agreements and back-to-back loans. This circular corresponds almost to the OECD Transfer Pricing Guidelines, which require a detailed comparability analysis and ensure safe havens.
However, there is insufficient analysis of TP methods or guidelines for choosing the more appropriate method. In addition, this circular is of limited scope and not extended to intra-group trade and economic transactions. Therefore, additional decisions can ensure the application of the TP framework to any controlled transaction under Article 33 of the ITL.
Managing partner, TaxExperts Group
Partner, TaxExperts Group
Partner, TaxExperts Group
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