On 30th of June 2022 the Cyprus parliament has voted into law the long anticipated documentation requirements on transfer pricing (law and regulations) effective from 1st of January 2022. The law and regulations are aligned with the recommendations set forth in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.
The transfer pricing documentation requirements apply to Cypriot tax resident persons and Permanent Establishments (PE’s) of non-tax resident entities for certain transactions with their related parties. The aim of the new law and regulations is to ensure compliance of covered entities with the arm’s length principle.
For quick information, transfer pricing is the way tax law allocates income to related companies and permanent establishments. More information on the new law are as follows:
Applicability of new law – change of related parties definition
According to the Cypriot 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
The law provides for two types of requirements for tax residents in Cyprus. The first one is 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. The second requirement is 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.
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.
In case of non-compliance with the aforementioned documentation requirements, penalties are applicable.
Specifically, in the event of non-submission by the due date, a penalty of €500 is imposed.
Moreover, in case where a taxpayer receives a notice form the Tax Department for provision of TP documentation (local file or master file), and the taxpayer fails to comply within the statutory 60-day deadline, penalties apply as follows:
- €5,000 if submitted between the 61st and 90th day
- €10,000 if submitted between the 91st and 120th day
- €20,000 if submitted after the 120th day or if not submitted at all
What taxpayers should do next
- Assess the impact of the law and regulations on the controlled transactions and on the overall activities of their Cypriot tax resident company or PE.
- Prepare the transfer pricing policy and establish appropriate internal control procedures based on the policy.
- Prepare the necessary transfer pricing documentation files to ensure that prices in the controlled transactions are set at arm’s length level before the reporting period (i.e. 2022) is over.
Asterisk does not provide TP Services directly but we can refer you to one of the licensed Cyprus Firms which provide such services.