NEWS

Effective from the tax year 2022 onwards, the simplification rules of 2.2857% on back to back loans etc. will cease to exist and a proper Transfer Pricing (TP) studies must be prepared for all transactions between connected parties exceeding €1,000,000 per year per category except for the financing category for which the threshold has been increased to €5,000,000.

 

When are companies related?

(1) If the same person has, directly or indirectly, at least 25% of the voting rights or of the share capital or is entitled to at least 25% share of the income of both companies

(2) lf the same person and persons connected with that person holds, directly or indirectly, at least 25% of the voting rights or of the share capital or are entitled to at least 25% share of the income of both companies.

(3) If a group of two or more persons holds, directly or indirectly, at least 25% of the voting rights or of the share capital or are entitled to at least 25% share of the income of each company and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either groups replaced by a person with whom that person is connected.

 

When is a company connected/related with a person?

(1) A company is connected with another person if this person holds, directly or indirectly, at least 25% of the voting rights or of the share capital or is entitled to at least 25% share of the company’s income or if that person and persons connected with him together holds, directly or indirectly, at least 25% of the voting rights or of the share capital or are entitled to at least 25% share of the company’s income.

(2) Any two or more people acting together to secure, directly or indirectly, at least 25% of the voting rights or of the share capital or are entitled to at least 25% share of the company’s income shall be treated in relation to that company as connected with one another and with any person acting on the directions of any of them to secure directly or indirectly at least 25% of the voting rights or of the share capital or is entitled to at least 25% share of the company’s income.

 

What should a taxpayer do if it has transactions between connected/related persons?

In accordance with the new provisions of the Income Tax Law, connected persons which are tax residents in Cyprus, or permanent establishments in Cyprus of non-tax resident persons (Liable Taxpayers) have the obligation to prepare:

(1)  a ΤΡ documentation file and

(2) a Summary of Information Table (SIT) for transactions falling within the ambit of Section 33 of the Income Tax Law (e.g., intercompany transactions).

 

What is a TP documentation file?

The TP documentation file consists of:

• The Master File
• The Cypriot (local) file

 

MASTER FILE

What is the Master File?

The master file contains standardized information relevant for all group members of a multinational enterprise (ΜΝΕ). More specifically, the Master File should provide an overview of the ΜΝΕ group business, including the nature of its global business operations, its overall transfer pricing policies, and its global allocation of income and economic activity in order to assist tax administrations in evaluating the presence of significant transfer pricing risk. In general, the master file is intended to provide a high-level overview in order to place the ΜΝΕ group’s transfer pricing practices in their global economic, legal, financial and tax context.

 

Who is obliged to prepare the Master File?

The master file obligation is applicable for Liable Taxpayers when they act as the Ultimate Parent Entity (UPE) or Surrogate Parent Entity (SPE) for Country-by-Country Reporting purposes, as defined in the Administrative Cooperation in the field of Taxation Law.

More specifically, a master file obligation will arise for Liable Taxpayers if both of the below

conditions are met:

(1) The taxpayer is part of an ΜΝΕ Group with a Country-by-Country Reporting obligation (e.g., with consolidated revenue above €750 million) AND

(2) The taxpayer is either the Ultimate Parent Entity (UPE) or the Surrogate Parent Entity (SPE).

 

When is the deadline for preparation and submission of the Master File?

The master file must be prepared together with the income tax return for the respective tax year ( e.g. 15 months after calendar year-end).

The master file must be made available by the liable Taxpayer at any time after the preparation deadline and submitted to the Tax Department upon request within 60 days.

 

When should the Master File be updated?

The master file is to be updated annually, and specific reference made to any significant changes of the market conditions that may impact the information and data included in the master file.

 

Cypriot File (Local File)

What is the Local File?

The local file refers specifically to material transactions of the local taxpayer. In contrast to the master file, which provides a high-level overview as described above, the local file provides more detailed information relating to specific intercompany transactions and helps to meet the objective of assuring that the taxpayer has complied with the arm’s-length principle for its material transfer pricing positions.

The local file focuses on information relevant to the transfer pricing analysis related to transactions taking place between connected parties (as defined in Section 33 of the Income Tax Law). Such information would include relevant financial information regarding those specific transactions, a comparability analysis, and the selection and application of the most appropriate transfer pricing method.

 

Who is obliged to prepare the Cypriot (Local) File?

The obligation to prepare the local file is applicable for Liable Taxpayers if their transactions with connected persons either exceed (or should have exceeded based on the arm’s-length principle) the amount of €1,000,000 in aggregate per category of transaction per tax year except financing activities for which the threshold has been increased to €5,000,000.

This means that in case a taxpayer has several transactions between connected persons but if separated per category they do not exceed €1,000,000 per year, then there is no obligation to prepare the local file.

 

Review of Cypriot (Local) File

The local file should be subject to Quality Assurance Review by a person who has a practicing certificate of ICPAC or any other recognized institute of certified accountants in Cyprus.

 

When is the deadline for preparation and submission of the Local File?

The local file must be prepared until the deadline for submission of the income tax return for the respective tax year ( e.g. 15 months after calendar year-end).

The local file is to be made available by the Liable Taxpayer at any time after the preparation deadline and submitted to the Tax Department upon request within 60 days.

 

When should the Local File be updated?

The local file is to be updated annually, and specific reference made to any significant changes of the market conditions that may impact the information and data included in the local file.

 

PENALTIES

What is the penalty for not submitting the TP documentation?

The ΤΡ documentation file is to be submitted to the Tax Department, upon request, within 60 days.

lf the ΤΡ documentation file is submitted after the 60th day, the penalties are as follows:

• If submitted between 61 and 90 days, the penalty is €5,000
• lf submitted between 91 and 120 days, the penalty is €10,000
• If not submitted or submitted after the 120th day, the penalty is €20,000