Author: Mr. Charalambos Papasavvas
Advocate – Legal Consultant Managing Partner of PAPASAVVAS & LISKAVIDOU LLC
Founder of RELOTECH EXPERTS – Founder of NEOCOURSES INNOVATION CENTER
Discover Cyprus’s new Transfer Pricing regulations for tax-resident companies. Ensure compliance, prepare Local Files, and understand your obligations Enforcement and Overview
Starting from the 2022 tax year, amendments to Cyprus Tax Law now include Transfer Pricing (TP) regulations for Cyprus tax-resident companies engaged in transactions with related parties. On June 30, 2022, the Cyprus Parliament approved changes to both the Cyprus Income Tax Law and the Assessment and Collection of Taxes Law, introducing compliance requirements related to the arm’s length principle. These changes align with the OECD Transfer Pricing Guidelines that many countries have adopted.
Local File Requirements
From January 1, 2022, Cyprus tax-resident companies involved in intra-group financing or other taxable transactions must prepare a Cyprus Local File, documenting “Controlled transactions” subject to Income Tax. The Local File must be ready by the deadline for the annual tax return submission.
Exemptions from Local File Requirements
Companies are exempt from preparing a Local File if they engage in:
- Controlled financial transactions totaling less than €5 million annually.
- Other controlled transactions amounting to less than €1 million annually.
While a Local File is not mandatory for exempted cases, companies must still provide the following:
- A description of the entity’s operations, including functions, assets, and risks (FAR analysis).
- An explanation of the pricing method used and why it is appropriate.
- Benchmarking analysis or other models based on the OECD Transfer Pricing Guidelines (TPG).
Although these exemptions simplify the process, the law does not impose automatic penalties for missing deadlines related to these exemptions.
Scope of Work
For companies required to complete a Local File or TP study, the documentation should include a functional analysis, outlining the economically significant activities, responsibilities, assets, and risks associated with the transactions. This analysis helps identify comparable transactions between unrelated parties, which form the basis of the transfer pricing analysis.
By understanding the functional and risk profiles of the parties involved, the analysis ensures that controlled transactions are evaluated against similar transactions between third parties to ensure they adhere to the arm’s length principle. The study will also document the arm’s length nature of the remuneration earned or incurred by the company for its transactions.
Contact our tax experts’ team for further guidance and assistance on compliance with the above tax Regulations at [email protected]
