Cyprus: 2022 transfer pricing changes
After recommendations by the OECD, the Cyprus parliament approved certain documentation requirements on transfer pricing (June 30th, 2022). The legislation is effective from 1 January 2022.
The purpose of the changed regulations is to warrant compliance of covered entities with “the arm’s length principle”, and to apply them to Cypriot tax resident individuals and Permanent Establishments of non-tax resident entities for certain transactions with their related parties or companies.
Amendments have been made to the income tax law regarding the definition of connected parties as follows:
- The same person (directly or indirectly) holds more than 25% of the voting rights or shares, or has the right to a share of more than 25% of the profits in both companies involved in the transaction.
- The same persons (and persons connected with the persons) hold directly or indirectly more than 25% of the voting rights or the shares, or has the right to a share of more than 25% of the profits in both companies involved in the transaction.
- When two or more persons hold directly or indirectly more than 25% of the voting rights or shares, or has the right to a share of more than 25% of the profits in both companies.
- The person holds directly or indirectly more than 25% of the voting rights or of the shares or has the right to a share of more than 25% of the profits in the company or the person and persons connected with the person hold directly or indirectly more than 25% of the voting rights or of the shares or has the right to a share of 25% of the profits in the company.
The requirements for transfer pricing documentation cover both controlled transactions by Cyprus tax resident companies and, controlled transactions by permanent establishments in Cyprus of non-tax resident companies.
Documentation Files of controlled transactions required include the Basic Documentation File for Prices of Controlled Transactions (known as Master File) and the Cyprus Documentation File for Prices of Controlled Transactions (known as Local File).
There will be no requirement to maintain a local file (Cypriot Documentation File) for Prices of Controlled Transactions for companies that the total value of transactions with related parties is below Euro 750.000 per year and per Category, for the following Categories:
- Royalties and other intellectual rights
- Financial transactions
Please note that there is no requirement to maintain a Basic Documentation File for Prices of Controlled Transactions if the company is not the Ultimate Parent Company or the Surrogate Parent Company.
The template of the Summary Table for Controlled Transactions will be published by the Tax Department and the person obliged to keep a Documentation File should submit a Summary Table of Information for Controlled Transactions for each tax year electronically to the Tax Department together with the tax return.
The Documentation File for Prices of Controlled Transactions must be made available to the Tax Commissioner at any time requested by him within 60 days from the receipt of the relevant request, either by the obliged person or by an authorized person from the obliged person to act as his/her representative for this purpose.
The Documentation File for Prices of Controlled Transactions must be updated annually.
The Council of Ministers will determine the fee that will be payable to the Tax Commissioner for the issue of an Advanced Pricing Agreement.
Connected persons who are tax residents of Cyprus or permanent establishments in Cyprus of non-tax resident companies must seek advance approval of the methodology for the transfer pricing of specific future or existing transactions by the Tax Commissioner.
Notifications and Regulations
The Tax Commissioner will issue and publish a notification in the official gazette that will further explain the following:
- The exact content and data contained in the Documentation File for Prices of Controlled Transactions
- The exact content and data contained in the Summary Information Table for Controlled Transactions
- Cases in which the above files are insufficient or incomplete
- Acceptable methods of setting transaction prices and the methods of determining the acceptable price range or profit margin
Time for collection and retention of Documentation Files
The Documentation File for Prices of Controlled Transactions must be drawn up to and including the date of the obligation to submit the income tax return of the obliged person for the tax year to which it refers and no later than 15 months from the end of the tax year.
The Documentation must be kept at the seat of the obliged liable party and shall be kept during the period for which there is a relevant obligation (6 years usually) to keep the books and data of the respective tax year.
A specific chapter must be included in the Documentation File for Prices of Controlled Transactions describing events that have an impact on the information and data provided to it and that are due to a change in market conditions.
Advance Pricing Agreements
The purpose of the Advance Pricing Agreements is the appropriate set of criteria used to determine controlled transactions prices over a specified period of time and must include the documentation method used, the comparison and reference fated and related adjustments and the critical assumptions for the specified profile and market conditions.
For non-submission or late submission of master or local files there is a penalty from €5,000 and up to €20,000, and a penalty of €500 for non-submission or late submission of the summary information file.
Important detail: The Tax Commissioners’ Notification is expected to be issued once the bills are published in the Official Gazette and become laws. At that time our firm will publish more details on the transfer pricing amendments.