Cyprus – Transfer Pricing Frequently Asked Questions (FAQ)

Cyprus – Transfer Pricing Frequently Asked Questions (FAQ)

A list of Frequently asked questions and answers as published by the Cyprus Tax Department, aiming to clarify certain issues enquired by local Tax Professionals and groups of Companies that are either located, controlled or want to establish a presence in the Island.


In accounting and taxation, transfer pricing states the rules and methods for pricing transactions between and within enterprises/companies under common control or ownership.

Because of the possibility for these cross-border controlled transactions to misrepresent taxable income, tax authorities in many countries can adjust intragroup transfer prices that vary from what would have been charged by unrelated enterprises.

The below answers are applicable to all transactions that fall within the scope of the Back-to-Back Circular and relate to loan agreements concluded as at the date of the issue of the FAQs and afterward (24/01/2022), as well as loan agreements that were concluded before that date and have not been examined by the Cyprus Tax Department by that date.

Please take into consideration that the below guidelines are generic and should not be treated as professional advice by our firm, other firms, or the tax department.


  1. Will Transfer pricing studies be required to be submitted to the Tax Authority as part of the Annual Tax Filing process?

    The Transfer Pricing studies will be submitted to the Tax Department upon request.
  1.  Who is eligible to prepare a Transfer Pricing study?

    A TP study is prepared by a TP (Transfer Pricing) expert (paragraph 29 and bullet point 4 of the Back-to-Back Circular).
  1.  Who is considered to be a Transfer Pricing expert?

    A TP expert is someone who possesses sufficient practical experience, competence, and technical knowledge to prepare a TP study in accordance with the OECD TP Guidelines, as amended and the provisions of the Cyprus Tax Legislation.
    A TP expert is qualified by sufficient evidence of his/her technical expertise, training, and knowledge in TP matters.
  1.  Is the company required to prepare a TP study when it chooses to apply the simplification measures as described in section 4 of the Back-to-Back circular?

    A company that opts to apply simplification measures (2% margin after-tax) because it is functionally reduced as it is purely an intermediary financing entity, should only prepare a functional analysis.
  1.  In case a company does not support its controlled transactions with a TP study and the Cyprus Tax Department makes an upward adjustment on taxable profit, how will such an adjustment be made?

    The Tax Department may assess the company’s taxable profits on the basis of the available information and at its own discretion in the absence of a TP study.
  1.  Should a Transfer Pricing study be prepared every tax year or only if something changes with regards to the intragroup loans?


     A TP study should be prepared when an intragroup loan is initiated and updated when:
    • new loans are provided or received by the company, or
    • significant terms of the existing loans change or amended, or
    • the functional profile of the company changes, or
    • the market and economic conditions change significantly (if applicable).

      The above list is indicative and is not exhaustive.
  1.  Paragraph 6 of the Back-to-Back circular makes reference to the term “controlled transaction’. Please provide us with a definition of a controlled transaction.

    Controlled transaction means ‘’transactions between related parties’’. Related parties are defined in paragraph 3 of article 33 of the Income Tax Law L. 118(I)/2002, as amended.
  1.  What constitutes “specialized personnel” as mentioned in paragraph 19 of the Back-to-Back circular?

    “Specialized personnel” should have sufficient knowledge, possess competence and experience to perform decision-making functions, and to control the risks of a controlled transaction under consideration.
    The term “Control over risk” is described both in the Back-to-Back Circular and in the OECD Transfer Pricing Guidelines for Multinational Enterprise and Tax Administrations, as amended.

Extracts from the OECD TP Guidelines: 

1.65 “Control over risk involves the first two elements of risk management defined in paragraph 1.61; that is (i) the capability to make decisions to take on, lay off, or decline a risk-bearing opportunity, together with the actual performance of that decision-making function, and (ii) the capability to make decisions on whether and how to respond to the risks associated with the opportunity, together with the actual performance of that decision-making function. It is not necessary for a party to perform the day-to-day mitigation, as described in (iii) in order to have control of the risks.

Such day-to-day mitigation may be outsourced, as the example in paragraph 1.63 illustrates. However, where these day-to-day mitigation activities are outsourced, control of the risk would require the capability to determine the objectives of the outsourced activities, to decide to hire the provider of the risk mitigation functions, to assess whether the objectives are being adequately met, and, where necessary, to decide to adapt or terminate the contract with that provider, together with the performance of such assessment and decision-making. In accordance with this definition of control, a party requires both capability and functional performance as described above in order to exercise control over a risk […]”.

The required level of the specialization of the personnel is in analogy to the functional profile of each entity.


  1.  Is there a requirement for the Company to hire specialized personnel?

    There is no requirement for the Company to hire specialized personnel provided that the Company’s board of directors has sufficient knowledge, possess competence, and experience to perform the decision-making functions and to control the risks of a controlled transaction under consideration.
  1.  Do interest-free contributions (that is, for example, cash advances) from shareholders who are physical persons fall under the definition of intragroup financing transactions as described in paragraph 2 of the Back-to-Back Circular?

    Yes, contributions from shareholders who are physical persons fall within the scope of the Back-to-Back Circular regardless of whether these are interest-bearing or not.
    However, contributions that are considered equity do not fall under the definition of financial means and instruments as described in paragraph 2 of the Back-to-Back Circular and thus do not fall within the scope of the Back-to-Back Circular.
  1.  Is there a requirement to change the terms of the loan agreements following the application of the arm’s length principle or the simplification measures as described in paragraph 25 of the Back-to-Back Circular (2% margin after the deduction of taxes)?

    There is no need to amend the terms of the loan agreements following the application of the arm’s length principle or the application of the minimum 2% margin after tax under the simplification measures.
  1.  Paragraph 25 of the Back-to-Back Circular states that in cases where the simplified measures are used, the minimum margin of 2% after-tax is applied on the value of the company’s assets. Please explain what does it mean “on the value of the company’s assets”?

    The term “company’s assets” shall be interpreted as the assets relating to the intragroup back-to-back financing transactions (that is, loan receivables) only.
    Moreover, the value of the loan receivables means the principal amount of the loan receivable. Under specific facts and circumstances, accrued interest could also be included in the value of the company’s assets (for example, if loan agreement includes provisions for capitalization of the interest or if as per the actual conduct of the parties accrued interest could be considered as additional financing).
  1.  Does a company that is engaged in back-to-back intra-group financing transactions, as well as in other activities such as holding of shares in subsidiaries, granting of loans to third parties, other trading activities (that is, trading in securities/ trading in FX/ management services etc.), fall within the scope of the Circular?

    Yes. Note that the Back-to-Back Circular covers only intragroup back-to-back financing transactions of such companies.
  1.  Does the back-to-back Circular apply only to cases where all parties in the back-to-back financing arrangement are Cyprus tax resident companies?

    The Back-to-Back Circular applies to both cross-border transactions and domestic transactions between related companies.

If you require further assistance, information, or consulting regarding transfer pricing in Cyprus or other jurisdictions please feel free to contact us directly. >

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