On the 6th of July 2023, a new circular was issued by the Tax department, in addition to the one voted in 2022, that takes into consideration the related transactions which are lower of the threshold of €750,000 in aggregate per type of transaction in a tax year. It is applied retrospectively from the 1st of January 2022 and a simplified documentation file will need to be provided to the authorities upon request in 60 days' time.
The contents of the simplified documentation file should consist of the below:
- a summarised description of the Company's functional analysis based on its functions, assets, and risks.
- the Company's characteristics based on its functional analysis.
- the basis for choosing a transfer pricing method as the most suitable one.
- a benchmarking analysis using internal or external comparables or any other acceptable by the OECD guidelines method.
The new circular mentions optional simplification measures/safe harbour rules that can be used in certain cases and should be disclosed by the Company during the completion of the Summary Information Table. The cases relate to financing to related parties through loans, financing from related parties through equity or through loans obtained for business use and low value adding services.
The legislation also specifies certain safe harbour provisional rates and mark-ups and the documentation contents that are required by the Tax department for each mentioned case. It is worth stating that the use of any simplification measures will be subject to DAC6 provisions.
Originally, the introduction of the new Transfer Pricing legislation that amended the Article 33 was voted on the 30th of June 2022 by the Cyprus parliament and is applied retrospectively from the 1st of January 2022.
The new legislation is enhanced with the OECD guidelines for Transfer Pricing of Multinational group of Companies in addition to the arm's length principal that was used in the Cyprus tax legislation. The arm's length principle states that the price in a transaction between two related companies should be similar to a price between two completely unrelated and independent companies.
A transaction between two entities would be considered as related if one company owns/controls at least 25% of the shares or voting rights of the other or if both companies are owned/controlled by 25% by the same company or individual. The related transactions considered under the new legislation are for goods, services, intellectual property, financing services and so on.
The new legislation states that a threshold in excess of €750,000 is applied in aggregate per type of transaction to determine whether a Cyprus tax resident company will have to prepare and present to the Tax authorities three certain Files.
The Local File and the Master File need to be prepared before the tax return filing deadline in case the tax resident entity's transactions were more than the threshold. Both files should be updated yearly and must be presented to the authorities upon request in 60 days' time.
The difference between 2 files is the content based on OECD guidelines. The Master file contains data and info for the whole group while the local file contains data only for the local taxpayer (legal entity).
The Summary Information Table needs to be prepared and submitted with the tax return form by all Cyprus tax resident entities, despite the threshold excess, and shall include details of the related companies and the nature of these transactions.
The Files are submitted annually, and relevant penalties will be applied by the Tax department in case the tax resident company did not submit or present the requested information on time.
Eurofast as a regional business advisory company incorporates professionals in Tax & Transfer Pricing, Payroll & Employment, Accounting & Audit, Advisory and Corporate and is currently present in over 23 countries of Southeast Europe and in the Middle East. We have the capability to provide you with more details about the legislation, assist you in the preparation and submission of the Files and handle the entire process with excellence.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.