Introduction
On 6 July 2023 the Cyprus Tax Department issued a circular (6/2023) that introduces simplification measures for taxpayers that are exempted from the obligation of preparing a TP Local file (i.e., their transactions with related parties, are below €750.000 per category of transactions).
The simplification measures apply as from 1 January 2022.
These simplification measures relate to:
a. Simplified transfer pricing documentation requirements
b. Introducing safe harbor rates for certain types of transactions
These are further explained below.
A. Simplified transfer pricing documentation requirements
The minimum documentation requirements apply in cases where the transactions between related parties do not exceed the €750.000 threshold per category of transactions. The minimum documentation requirements to support the arm’s length nature/pricing of such transactions are as follows:
a. A brief functional analysis of the Cypriot entity (functions performed, assets used, risks undertaken).
b. A characterization of the entity based on its functional profile (i.e., limited risk service provider, fully fledged distributor, principal etc.)
c. A provision of arguments/reasons why the selected pricing method is the most appropriate.
d. A transfer pricing benchmarking study using internal or external comparables (or any other method as per OECD TP guidelines) to support the pricing used.
The minimum TP Documentation should be submitted to the Cyprus Tax Department upon request (within 60 days).
In case that a taxpayer opts to apply for the TP simplification documentation requirements and at the same time opts for safe harbor rates for the certain types of transaction then need only to prepare (a) and (b) from the documentation requirements plus the documentation requirements for the specific type of transaction.
B. Safe harbor rates for certain types of transactions
The Cyprus tax department introduced minimum/maximum acceptable profit margins (safe harbors) for the categories of transactions as below. These apply if the transactions are below the €750.000 threshold per category of transactions.
These profit margins will be revised from time to time based on market changes and other factors deemed appropriate.
No deviation is acceptable from the safe harbors. In addition, the Cyprus tax department will not accept any downward adjustment if the accounting profit is higher from the profit resulting from application of a TP benchmark study or the simplification measures.
Opting for safe harbors for the selected transactions is reportable under DAC 6 reporting requirements.
The persons elect to apply for any of the safe harbors described below needs to disclose such election to the Cyprus Tax department through the completion of the relevant part in the Summary Information table each tax year.
It is important to note that Simplification Measures cannot be applied if reliable internal comparables (i.e. comparable transactions with unrelated parties) exist and hence can be used to determine the arm’s length price of the related parties’ transactions.
Analysis of transactions where safe harbor rates apply:
Transactions Safe Harbor rate Documentation requirements in
addition to A (a) and A (b)
Providing finance Minimum return of 2,5% The Company should provide:
to related parties before taxes. The return is after a) An analysis of loans receivables
through debt the deduction of allowable expenses under simplification rules
(back-to-back financing) and is estimated on the average loan b)Justification for the classification
Debt includes borrowings receivable
during the year and of the loans receivables as
from related parties, credit includes interest accrued but not back-to-back
institutions, shareholders received. c) Workings and reconciliations
current accounts etc. on how the simplification
measure applied on the tax computations.
Providing finance to Minimum return is the 10-year The Company should provide:
related parties through government bond yield (as of 31 a) An analysis of loans receivables
equity. December of the previous year) under simplification rules
Equity includes the proceeds of
the country that the loan b) Justification to support that
from issue of share capital, recipient (borrower) operates the loans receivables are financed
share premium, non-reciprocal increased by 3,5%. through equity.
capital contributions and funds The return is estimated c) Workings and reconciliations
out of the profits of the Company on the average loan receivable on how the simplification
(retained earnings). during the year and includes measure applied on the tax
interest accrued but not received. computations.
In case the 10-year government
bond yield is negative,
then
only the 3,5% margin will apply.
Borrowings obtained and the The maximum allowable interest The Company should provide:
funds are used in the business. expense is the Cyprus 10-year
a) An analysis of borrowings under
These relate to borrowings, government bond yield (as of 31
simplification rules
bonds or other instruments December of the previous year) b) Justification to support that the
obtained from related parties and + 1,5%. The return is estimated borrowings are obtained from
carry interest. on average borrowings during related parties and are used in the
the year and includes interest
business.
accrued but not paid. c) Workings and reconciliations on
how the simplification measure applied on the tax computations.
Provision and Receipt of Low If the Cypriot company is the a) Description of low value-added
Value
adding services. Provider of the
Low Value services provided.
Low Value adding services as per adding services, the minimum b)
Identity of the recipients of the
the definition provided in the OECD return is 5% mark up on total services
TP Guidelines Chapter VII, part D, costs. c) Justification for each category
par.
7.43-7.65. If the Cypriot company is
the of service classified as low value
As per paragraph 7.45, Low Value recipient of
the Low Value adding -added nature.
adding services for the purposes of services, the maximum return d) Description of the selected
the simplified approach are services is 5% mark up on total costs. cost allocation keys.
performed by one member or more e) Determination of costs pool,
than one member of a Group on and application of the selected
behalf of one or more other group allocation keys with the margin.
members
which: f) Workings and reconciliations
· are of a supportive nature, on how the simplification measure
· are not part of the core
business applied on the tax computations.
of the Group (i.e. not creating the profit-
earning activities or contributing to
economically
significant activities of the Group),
· do not require the use of
unique
and valuable intangibles and do not lead
and valuable
intangibles,
and
· do not involve the assumption
or
control of substantial or significant risk
by the service provider and do not give
rise to the creation of significant risk for
the service provider.
Overview
Taxpayers that have transactions with related parties below €750.000 per category of transactions should still prepare simplified transfer pricing documentation to support the arm’s length nature of these transactions.
For certain types of transactions, falling below €750.000, taxpayers can opt for the minimum/maximum acceptable profit margins (safe harbors), however it is highly recommended that taxpayers should examine carefully whether the application of those will actually save tax/administrative cost, or it would be more beneficial to opt for having a full transfer pricing study to support the arm’s length pricing.
How we can help:
Our transfer pricing team has an in-depth knowledge of transfer pricing and can help you to assess the potential impact of the new legislation to your business and assist in the preparation of the relevant documentation for compliance. Further we can help you develop your group transfer pricing policies in line with your business structure and strategy.
Our contact details
Lefteris Androkli
Director
lefteris.androkli@premioserve.com.cy
Tel: +35725817722