On 30 June 2022, a package of measures containing comprehensive transfer pricing (“TP”) requirements for businesses has been voted into law by the Cyprus House of Representatives. The measures are in line with the recommendations of the Organization for Economic Co-operation and Development (OECD) within the framework of Action 13 of the Base Erosion and Profit Shifting (BEPS) project. The new rules have been implemented via amendments to the Cyprus Income Tax Law (ITL) and the issuance of Regulations. The Assessment and Collection of Taxes Law has also been amended to introduce penalties for non-compliance with the new TP documentation requirements.
The rules introduce new TP documentation requirements as from 1 January 2022, including:
maintaining of a Local File for all taxpayers with related party transactions that exceed €750.000 per category of transaction;
maintaining of a Master File for taxpayers that are the Ultimate Parent Entity or the Surrogate Parent Entity of an MNE Group with consolidated group revenues exceeding €750M for CbCR purposes;
preparation and submission of a Summary Information Table (SIT) by the taxpayer that will include information regarding related party transactions.
On 1st February 2024 the Commissioner of Taxation sent a letter to the Institute of Certified Public Accountants of Cyprus, the Cyprus Chamber of Commerce and Industry and the Cyprus Employers and Industrialists Federation informing them that the thresholds for Local File requirements have been increased for the tax year 2022.
The Transfer Pricing (“TP”) rules provide that the aggregate (arm’s length) value of all transactions in a specific category needs to be considered for the purposes of assessing whether the relevant threshold has been exceeded and, therefore, whether the transactions in that category need to be documented in a Local File.
Based on the draft Summary Information Table published in Notification 314/2022, the five relevant categories of transactions are:
Goods
Services
Rights and other Intangible Assets
Financial Transactions
Other Transactions.
Changes in thresholds:
Increases in the thresholds have been advocated by various stakeholders, but due legal process needs to be followed in order to effect the necessary legislative changes to implement these changes. In the meantime, the Commissioner of Taxation has formally announced in the letter that, for the sake of clarity to taxpayers and their advisors, an increase in the thresholds will apply for the tax year 2022.
The relevant changes to the thresholds for the tax year 2022 are as follows:
• The threshold for the category of financing transactions increases from €750.000 to €5.000.000.
• The threshold for all other categories of transactions increases from €750.000 to €1.000.000. Impact for taxpayers
The issuance of this letter provides additional clarity to taxpayers in the context of preparing their TP documentation for the tax year 2022 and is expected to reduce the compliance burdens for a number of Cyprus tax resident taxpayers. It should be noted that for transactions that do not exceed the threshold, documentation is still required but in a simplified format as described in Circular 6/2023.
The precise contents of such simplified documentation (e.g. functional analysis and any benchmarking) depends on the type of transaction and whether or not one of the available safe harbors has been opted for. Thus, TP documentation work is still required for transactions that do not exceed the threshold and will include to some extent the type of TP analysis that is contained in a full Local File.
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