On 6 July 2023, the Commissioner of Tax issued circular 6/2023 providing clarifications and guidance on the applicability of the Transfer Pricing (TP) Legislation applicable retroactively from January 1, 2022.
The Circular presents simplified TP documentation on categories of transactions which do not exceed the threshold of €750.000, and thus do not create the obligation for the preparation of a Cyprus Local File.
- Minimum documentation on file
Taxpayers who engage in controlled transactions below the €750,000 threshold should maintain the following minimum documentation on file, in order to support their compliance with the arm’s length principle in respect of these controlled transactions:
- Short functional and risk analysis.
- Description of the entity’s characterisation
- Method of documentation selected and basis of selection.
- Economic analysis with comparability search results based on OECD guidelines.
- Safe harbour margins
Taxpayers who are exempt from the obligation to prepare a Cyprus Local File because they are not exceeding the threshold of €750,000 per category per year and who engage in any of the following types of controlled transactions can use the simplification measures (safe harbour margins):
- Provision of finance to related parties funded through ‘debt (e.g., back-to-back loans).
The required net return (before tax) has been set at 2,5% on the average principal of the loan receivable during the year, including any accrued interest.
- Financing arrangements to related parties financed out of equity.
The minimum return has been set as being equal to the 10-year government bond yield of the country of residence of the borrower plus 3,5% (before taxes). The return is calculated based on the average principal of the loan receivable during the year, including any accrued interest.
- Loans payable to related parties. The funds are used in the business
The maximum allowable borrowing cost will be calculated based on the 10-year government bond yield of Cyprus of the tax year under consideration, plus 1,5% (before taxes). The calculation will be based on the average principal of the loans during the year (plus any accrued interest).
- Low value-added services.
Minimum 5% markup on the relevant costs. For receipt of services, maximum 5% markup on the relevant costs.
We remain at your disposal for any further clarifications that may be needed.