On 5 January 2023 the Cyprus Tax department (CTD) issued a circular (1/2023) which terminates the application of “safe harbours” on back-to-back financing transactions with related parties. The termination applies from 1 January 2022 onwards.
The “safe harbours” being either an after-tax return of 2% on loans granted to related parties (for pure intermediary financing companies) or a 10% after tax return on equity (for companies with a similar functional profile with a credit institution) have been introduced since 1 July 2017 with Interpretive Circular 3. Companies that adopted safe harbours were not obliged to prepare a full transfer pricing study to support their remuneration; only a functional analysis was needed to support that were eligible for the applying of the safe harbours.
As a result of the termination, the companies that used to determine their remuneration, for tax purposes, based on the above simplification measures now need to fully adopt the provisions of the new transfer pricing legislation as from 1 January 2022 and determine their remuneration based on a transfer pricing study and prepare accordingly a Local File.
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