New Transfer Pricing Legislation approved by the Cyprus House of Representatives
 
On 30 June 2022, the House of Representatives of the Republic of Cyprus approved new transfer pricing rules and documentation requirements (the “New TP Legislation”) which are aligned with the recommendations of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
 
The New TP Legislation has been implemented through:
 
1.     Amendments to the Income Tax Law;
2.     Amendments to the Assessment and Collection of Taxes Law;
3.     Introduction of new Regulations; and
4.     Introduction of new Notification.
 
The New TP Legislation is effective as of 1 January 2022.
 
In detail
 
The New TP Legislation applies to Cyprus tax resident persons and permanent establishments of non-tax resident persons situated in the Republic of Cyprus, that engage in certain transactions with their related parties (the “Controlled Transactions”). The aim of New TP Legislation is to ensure compliance with the arm’s length principle.
 
The amendments to the New TP Legislation, inter alia, are as follows:
 
1.     Amendment to the definition of “Related Parties”
 
Section 33 of the Income Tax Law (Law 118(I)/2002) has been amended by introducing, 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)   A company is connected with another company under the following conditions:
 
- 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 least 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.
 
(b)  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.
 
(c)   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.
 
2.     TP documentation requirements
 
The following new requirements have been introduced for related parties which are Cyprus tax resident persons and/or permanent establishments of non-tax resident persons situated in the Republic of Cyprus that engage in Controlled Transactions:
 
(a)   Maintain a TP Documentation File:
 
Subject to the exemptions listed below, they are required to prepare on an annual basis a TP Documentation File, which consists of the “Master File” and the “Cyprus Local File”.
 
- Cyprus Local File: The Cyprus Local File for a tax year concerned should be prepared and maintained by all taxpayers involved in Controlled Transactions. Exception is granted if the volume of controlled transactions does not exceed EUR 750,000 per category of transactions.
 
Deadline: The 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). After the deadline of preparation and upon request by the Cyprus Tax Department, the Master File should be submitted to the Cyprus Tax Department within 60 days from the day of request.
 
- Master File: The Master File should be prepared and maintained only by Cyprus tax resident entities that are the ultimate parent or surrogate parent entity of an MNE group falling under the scope of Country-by-Country reporting with annual consolidated turnover over EUR 750 million. All other persons are exempt from this obligation.
 
Deadline: The 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). After the deadline of preparation and upon request by the Cyprus Tax Department, the Master File should be submitted to the Cyprus Tax Department within 60 days from the day of request.
 
(b)  Submit a Summary Information Table:
 
A Summary Table must be prepared by all taxpayers that engage in Controlled Transactions on an annual basis, disclosing details regarding such transactions, including the names and tax identification codes of the related counterparties, and the respective nature and value per transaction category (goods, services, financing transactions, IP, other).
 
Deadline: The Summary Table will have to be filed electronically together with the Income Tax return for the respective tax year (e.g. currently 15 months after calendar year-end).
 
3.     Administrative Penalties:
 
The following new administrative penalties have been introduced in case of non-compliance with the submission deadlines referred to above.
 
(a)   Failure to submit the Summary Information Tale by the deadline is EUR 500.
 
(b)  Failure to submit the Local File and Master File within 60 days from the day of request by the Cyprus Tax Department:
 
- EUR 5,000 if submitted from 61 days to 90 days after request date.
- EUR 10,000 if submitted from 91 days to 120 days after request date.
- EUR 20,000 if submitted 120 days after request date.
 
4.     New Advance Pricing Agreement procedure
 
According to the new Regulations, Cyprus tax resident persons and non-Cyprus tax resident persons that have a permanent establishment situated in Cyprus may submit to the Cyprus Tax Department an Advance Pricing Agreement (“APA”) request with respect to Controlled Transactions.
 
The APA determines in advance of controlled transactions an appropriate set of criteria for determination of transfer pricing over a fixed period of time, including, the method to be followed for documenting controlled transactions, the comparative or reference data and related adjustments of controlled transactions, as well as the critical assumptions about the operating profile and market conditions.
 
(a)   Types of APAs
 
The Regulations allow for unilateral, bilateral or multilateral APAs.
 
- A unilateral APA request for Controlled Transactions involves only the Cyprus Tax Department.
 
- A bilateral or multilateral APA request involves the tax authorities in other jurisdiction(s) with which Cyprus has concluded a Double Tax Treaty. In such cases, a corresponding request needs to be filed by the taxpayer with the authorities in the other jurisdiction(s) and the CTD may consult in writing with such authorities under the relevant mutual agreement and exchange of information procedures and applicable EU legal framework, for the purpose of issuing the APA decision.
 
(b)  Timeframe and validity period
 
- The Cyprus Tax Department examines the APA request and approves or rejects it within 10 months from the date of submission of the APA request by the taxpayer (the Cyprus Tax Department may notify extension of this deadline up to 24 months). The period of validity of the APA cannot exceed 4 years and it cannot apply for any tax year prior to the tax year in which the request is submitted.
 
- The Regulations provide for mechanisms with respect to the amendment, cancellation or revocation of an APA subject to a number of conditions, including, inter alia, material changes in critical assumptions noted in the APA, failure of the 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.