Cyprus introduces transfer pricing rules and documentation requirements

The Cyprus parliament approved a law and regulations on 30 June to provide for the introduction of detailed transfer pricing (TP) legislation in Cyprus for the first time. An advance pricing agreement (APA) programme was also introduced.

The aim of the new law and regulations is to ensure that domestic and international intragroup transactions between covered entities are conducted according to the arm’s length principle. Implemented by amendments to the Income Tax Law of 2002 and subsidiary regulations, they will have retroactive effect from 1 January 2022.

The new TP legislation incorporates the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations and is also in line with the framework under Action 13 of the OECD Base Erosion and Profit Shifting (BEPS) project.

The new rules apply to transactions between related parties, both legal entities and individuals. For legal entities, ‘related parties’ are broadly where one party has a direct or an indirect relationship of at least 25% of the share capital or voting rights of another party.

TP documentation will have to be prepared and maintained for all related party transactions entered into by Cyprus resident companies and foreign entities operating through a permanent establishment in Cyprus, subject to certain exemptions.

The first requirement is to submit a summary information table that includes intercompany transactions, general information about the group, the profile of the business and the TP method used. This must be submitted in all cases where there are transactions with related parties, irrespective of value.

The second requirement is to prepare a TP documentation file consisting of a local file and, if applicable, a master file. The local file refers to material transactions of the local taxpayer and includes a TP study to justify compliance with the arm’s length principle. This requirement is subject to a small-size exemption that applies where the controlled transactions cumulatively, per category, do not exceed €750,000 per tax year.

The master file requirement applies only to companies who act as the Ultimate Parent Entity (UPE) or Surrogate Parent Entity (SPE) of a multinational enterprise group with consolidated revenue above €750 million. The must provide a high-level overview of the taxpayer’s global business operations, including its organisational structure, overall TP policies, profit drivers and the allocation of income and profits of the multinational group as a whole.

The new law also provides for an Advance Pricing Agreement (APA) mechanism. A taxpayer can apply to the Tax Commissioner for pre-approval of the TP methodology selected, and/or the pricing of specific or existing cross-border transactions with related parties.

The TP documentation files and summary information table for a particular year should be prepared no later than the due date for submitting the taxpayer’s Income Tax Return for that year. Specific penalty provisions will be imposed. For late submission of the summary information table a €500 penalty is imposed. If TP documentation is not made available to the Tax Commissioner within 60 days of notification of a request, a penalty of €5,000 is imposed if submitted between 61 and 90 days, rising to €10,000 from 91 to 120 days, and to £20,000 if not submitted or submitted after the 120th day.