Cyprus introduces transfer pricing rules and documentation requirements
Cyprus introduces transfer pricing rules and documentation requirements
Executive summaryOn 30 June 2022, the House of Representatives of Cyprus voted on and approved amendments to the Income Tax Law and the Assessment and Collection of Taxes Law in relation to transfer pricing (collectively TP legislation).The above legislative developments aim to introduce transfer pricing rules and documentation requirements in accordance with recommendations of the Organisation for Economic Co-operation and Development on Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TP Guidelines).The laws will enter into force once published into the Official Gazette of the Republic, which is expected to occur in the next couple of weeks. The TP legislation will be effective as of 1 January 2022.This Alert summarizes the key changes and the general transfer pricing rules that will apply as of 1 January 2022.
Amendments of the Income Tax Law (ITL) and issuance of the RegulationsSection 33 of the ITL was amended as follows:
Moreover, the Council of Ministers will issue transfer pricing regulations regarding transfer pricing (TP) documentation and APAs (the Regulations). The Regulations will provide further details for TP documentation requirements as well as with respect to the procedure for APAs.Both the legislative amendments as well as the Regulations will be effective as from 1 January 2022.
- Introduction of a 25% threshold in defining the relationship or connection of a Cypriot company with another person for Cypriot transfer pricing purposes
- Removal of the reference to ”control” in relation to a partnership
- Stipulation that the arm’s-length principle wil be interpreted in accordance with the OECD TP Guidelines as amended from time-to-time
- Introduction of the provisions relating to the application of the OECD TP Guidelines, the content of the TP Documentation File (Local and Master Files) and the Summary Information Table (SIT) and the documentation methods for intercompany transactions
- Introduction of the concept of Advance Pricing Agreements (APAs)
The key provisions are summarized below.
Introduction of 25% relationship or connection threshold
Section 33 of the ITL is amended to introduce, among others, a percentage in defining the relationship or connection of a Cypriot company with another person for transfer pricing purposes.More specifically, following the above amendments, a company is connected with another company under the following conditions:
Moreover, 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.Finally, 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.
- 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.
- If the same person and persons connected with that person holds, directly or indirectly, at east 25% of the voting rights or of the share capital or are entitled to at least 25% share of the income of both companies.
- 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 group as replaced by a person with whom that person is connected.
TP documentation requirementsIn accordance with the new provisions of the ITL, 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 a TP documentation file and SIT for transactions falling within the ambit of Section 33 of the ITL (e.g., intercompany transactions) subject to the conditions detailed below.The TP documentation file is to consist of the:
Master FileIn accordance with OECD TP Guidelines, the master file contains standardized information relevant for all group members of a multinational enterprise (MNE). More specifically, the Master File should provide an overview of the MNE 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 MNE group’s transfer pricing practices in their global economic, legal, financial and tax context.
- Master file
- Cypriot local file (local 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:
- The taxpayer is part of an MNE Group with a Country-by-Country Reporting obligation (e.g, with consolidated revenue above €750 million).
- The taxpayer is either the Ultimate Parent Entity (UPE) or the Surrogate Parent Entity (SPE).
Deadline for preparationThe master file is to be prepared by the Income Tax Return submission deadline for the respective tax year (e.g., currently 15 months after calendar year-end).
Deadline for submissionThe 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.
UpdatesThe 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.Local file
In accordance with OECD TP Guidelines, 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 ITL). 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.
ObligationThe local File obligation 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 €750,000 in aggregate per category of transaction per tax year.
Sign-off requirementThe local file should be subject to Quality Assurance Review (sign-off) by a person who has a practicing certificate of ICPAC or any other recognized institute of certified accountants in Cyprus.
Deadline for preparationThe local file is to be prepared by the Income Tax Return submission deadline for the respective tax year (e.g., currently 15 months after calendar year-end).
Deadline for submissionThe 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.
UpdatesThe 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.Summary Information Table
The SIT is an additional form (TP return) that should reflect high-level information about the taxpayer’s annual intercompany transactions, including details of the counterparties, category of intercompany transactions entered into, and amount per transaction category.
ObligationThe SIT reporting obligation is applicable for all Liable Taxpayers on an annual basis.
Deadline for submissionThe SIT shall be submitted to the Tax Department concurrently with the Income Tax Return.
An APA is a voluntary agreement between a taxpayer and one or more tax authorities that allows the parties to agree in advance on the transfer pricing methodology for any given intercompany transaction(s) for a specific period of time. More specifically, an APA determines an appropriate set of
criteria (e.g., method, comparables and appropriate adjustments thereto, critical assumptions as to future events) to be applied for a fixed period of time with respect to specific controlled transactions concluded based on the arm’s-length principle. The main benefit provided by an APA for a taxpayer is the ability to obtain some degree of certainty regarding how the law will be applied in a given set of circumstances.
Eligibility and types of APAs
APAs are available for the Liable Taxpayers. General provisions of the Regulations allow for unilateral, bilateral or multilateral APAs.
In the case of a bilateral or multilateral APA, the Liable Taxpayer should submit a corresponding APA application to the competent authorities of all relevant foreign tax authorities.
- A unilateral APA involves only the Liable Taxpayer and the Cyprus Tax Department.
- A bilateral APA involves the Liable Taxpayer and its non-Cypriot connected counterparty as well as the Cyprus Tax Department and the foreign tax authority.
- A multilateral APA involves the Liable Taxpayer and its non-Cypriot connected counterparties as well as the Cyprus Tax Department and the foreign tax authorities.
Timeframe and validity period
Upon submission of an APA request to the Tax Department, the Tax Commissioner shall accept or reject the APA request within 10 months. The Tax Commissioner has the right to extend the timeframe up to 24 months upon notification of the applicant.The APA will be valid for period of up to four years.The Regulations provide for mechanisms with respect to the amendment, cancellation or revocation of an APA subject to a number of conditions, including among others, material changes in critical assumptions noted in the APA, failure of the Liable Taxpayer to comply with the terms and conditions of the APA, changes in the tax law or the double tax treaty provisions affecting the APA.Amendments of the Collection and Assessment Law
The Collection and Assessment Law has been added, introducing penalties for noncompliance with the submission deadlines for the TP documentation file and the SIT.More specifically, the penalty for non-submission of the SIT by the deadline as provided in the Regulations (e.g., the submission deadline of the income tax return) is €500.
Moreover, as detailed in the Regulations, the TP documentation file is to be submitted to the Tax Department upon request within 60 days. If the TP documentation file is submitted after the 60th day, the penalties vary as follows:
- If submitted between 61 and 90 days, the penalty is €5,000
- If 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
Cyprus introduces an increased deduction for R&D related expenses
On 20th of July 2022, the Cypriot Income Tax Law has been amended to grant an increased deduction on research and development expenses (the ‘’R&D expenses’’) for the years 2022, 2023 and 2024.
Eligible research and development expenses that will be deducted from the taxable income of the economic owner of the IP assets will equal to 120% of the actual R&D expenses incurred.
Section 9(1)(d) of the Cypriot Income Tax Law has been amended to expressly provide that all expenses for scientific research, and all research and development expenses (“R&D expenses”), as recognized by international accounting standards, that have been incurred by a person who carries on a business and has the economic ownership of the relevant intellectual property asset will be treated as tax deductible.
Moreover, any R&D expenses that are of a capital nature will be covered by the existing provisions of Section 9(1)(l) of the Income Tax Law. This section provides that all expenses of a capital nature will be amortized and allocated over the useful economic life of the asset (as determined by acceptable accounting standards) with a maximum period of 20 years.
Moreover, it is provided that an additional deduction which will equal to 20% of the actual amount of the relevant R&D expenses, will be available for R&D expenses incurred during the tax years 2022, 2023 and 2024 (including expenses of a capital nature).
It is clarified that this increased deduction should not be available to taxpayers that claim a deemed deduction under the provisions of the IP Box regime, under Section 9(1)(k) of the Income Tax Law.
The introduction of this increased deduction for R&D expenses is a welcome development which can be placed among the government’s overall initiative to render Cyprus as an attractive destination for technology companies wishing to transfer or to expand their operations in Cyprus.