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On 30 June 2022 the Cyprus House of Representatives enacted an elaborate transfer pricing framework.

What is transfer pricing
Transfer pricing is the way tax law allocates income to related companies and permanent establishments.

Why is the new framework important
Cyprus is one of the last countries in the EU to implement transfer pricing rules. Before the enactment of this law, the legal basis to address transfer pricing issues rested on the arm's length principle (ALP), as found in section 33 of the Income Tax Law of 2002 (ITL), which is commensurate to Article 9 of the OECD Model Tax Convention and was incorporated into the ITL in 2002. For two decades, the ITL provided no guidance as to how to apply the ALP in practice, thus allowing uncertainty in the market and limited options for obtaining a binding ruling.

How the new transfer pricing framework is implemented
The new rules have been implemented via amendments to the ITL and the issuance of subsidiary regulations. The Assessment and Collection of Taxes Law has also been amended to introduce penalties for non-compliance with the new transfer pricing documentation requirements.

What is the basis of the new transfer pricing framework
The new transfer pricing legislation incorporates the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD TP Guidelines). In addition, the measures are in line with the recommendations of the Organisation for Economic Co-operation and Development (OECD) within the framework of Action 13 of the Base Erosion and Profit Shifting (BEPS) project.

Scope of new transfer pricing legislation
According to the new legislation, the new transfer pricing rules apply to transactions between related parties (legal persons and individuals). For legal entities, the new law provides detailed rules as to the meaning of the term "related parties" in an effort to capture different relations that there is a "control" situation. The main rule of the law is that when one legal entity participates in the share capital of another legal entity through the direct or indirect holding of share of at least 25 per cent, the two parties are considered related parties.

Main requirements of the new transfer pricing framework
The new transfer pricing framework imposes the following requirements for Cyprus tax resident companies as well as permanent establishments of non-resident companies tax residents in Cyprus:

  • First, to submit a Summary Information Table which includes intercompany transactions, general information about the group, the profile of the business and the transfer pricing method used.
  • Second, to maintain transfer pricing documentation supporting their controlled transactions with related parties as defined in Section 33(3) of the ITL. The documentation will need to be maintained in the form of a local file whereas in certain limited cases a master file may also be required if the taxpayer is not exempt from this requirement.
  • Third, to prepare a Transfer Pricing Study to justify compliance with the arm's length principle subject to a small size exemption. The small size exemption applies when the controlled transactions cumulatively, per category, do not exceed € 750,000 per tax year. As the law explicitly incorporates the OECD Guidelines, any Transfer Pricing Study has to cross-reference the OECD Guidelines. The OECD Guidelines articulate a specific process for undertaking a transfer pricing analysis.

Material period

The new requirements will be implemented for tax years starting from 1 January 2022 onwards. The Transfer Pricing Study and the 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.

The new law provides specific penalty provisions. In the event of late submission of the summary information table, a €500 fine is imposed whereas in case the documentation is not made available to the Tax Commissioner within 60 days from the notification of a request, a fine of up to €20.000 can be imposed.


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