On 30 June 2022, the Cyprus Parliament voted into law the long-anticipated amendments to the Income Tax Law relating to Transfer Pricing (“TP”).
The law will enter into force once published in the Official Gazette of the government and has an effective date of 1 January 2022.
The TP requirements of the Law cover all types of transactions between related parties in excess of €750.000 per category of transaction. Examples include, but are not limited to, sales and purchases of goods and services, transactions relating to intellectual property, loans, etc.
Related Party Definitions
Related parties are defined by a 25% relationship test. Specifically the following conditions would constitute related parties:
If the same person has at least 25% (directly or indirectly) 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.
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.
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.
Documentation to be prepared and deadlines
Taxpayers that are engaged in related party transactions will have the obligation to prepare the documentation file which consists of the master file and local file as well as a table of summarized information.
The table of summarized information should be prepared and submitted to the Cyprus tax department by all taxpayers who have related party transactions by the due date of the corporate income tax return.
The local file for the tax year concerned should be prepared by the due date of the corresponding corporate tax return (for controlled transactions exceeding the €750.000 threshold). This will need to be submitted to the Tax Department upon request within 60 days.
The master file for the tax year concerned should be prepared by the due date of the corresponding corporate tax return. This applies to companies that are ultimate or surrogate parent entities of multinational groups with annual consolidated turnover over €750 million. This will need to be submitted to the Tax Department upon request within 60 days.
Penalties
Failure to prepare the above mentioned documentation will lead to the following penalties:
€500 penalty for non-submission or late submission of the table of summarized information
Late or non submission of the TP documentation files will be subject to the following:
€5.000 for delayed submission between day 61 and 90
€10.000 for delayed submission between day 91 and 120
€20.000 (maximum penalty) for non-submission or submission after day 120
Advanced Pricing Arrangements
The amendments of the Law have also introduced the ability for taxpayers to apply for an advanced pricing arrangement (APAs). An APA is an agreement between the taxpayer and the tax authority specifying the pricing method that the taxpayer will apply to a related company transaction.
Upon submission of the APA to the Tax Department, they will have 10 months (with right to extend to 24 months) to accept or reject the APA. The APA will be valid for a period up to 4 years. The pricing of the tax department has not yet been made available
How Elsavco can help
If you would like to discuss the potential impact of the new legislation on your business please contact us at info@elsavco.com or on 22811900.