Transfer-Pricing Rules – Simplification measures for low value
transactions
The
Cyprus Tax Department has issued a new Circular 6/2023 that provides guidance
to persons that are exempt from the obligation to maintain local file as a
result of the volume of controlled transactions falling below the threshold of
€750.000 cumulatively per category of transaction.
The
Circular provides for simplified documentation that is required to be
maintained in relation to transactions with connected parties in order to
support the arm’s length nature of such transactions.
In
addition, the Circular introduces optional simplification measures by the use
of safe harbours for certain controlled transactions.
Simplified
transfer-pricing minimum documentation requirements
a)
Brief description of the functional
analysis (functions, assets, risks).
b)
Description of the profile of the
entity based on the functional analysis.
c)
Select the most appropriate
transfer-pricing method and document the reasons for selection.
d)
Determination of arm’s length price
based on benchmarking study.
Simplification
measures – Eligible transactions for safe harbours
1.
Providing loans to connected persons
that are financed out of financial means, such as bonds, loans from connected
parties and cash advances/loans from credit institutions.
Transactions will be considered to be at arm’s length provided that the minimum
profit margin is 2,5%, before the deduction of taxes but after the deduction of
any expenses incurred wholly and exclusively for the acquisition of the
specific income.
2.
Providing loans and
cash advances to connected persons
to the extent that the loans are financed by own funds, i.e. share capital,
share premium or realized profits. Transactions
will be considered to be at arm’s length provided that the minimum interest
rate is equal to the yield of the 10-year government bond of the country of the
borrower (as at 31 December of the previous year) increased by 3,5%, before the
deduction of taxes.
3.
Interest bearing loans payable to
connected parties to the extent that the funds obtained are used in the
business. Transactions will be considered to be at
arm’s length provided that the interest rate does not exceed the yield of the
10-year government bond of Cyprus (as at 31 December of the previous year)
increased by 1,5%, before the deduction of taxes.
4.
Low value adding services.
Sush are considered services of supporting character, that are not related to
the basic activities of the group, that do not make use of unique IPs or create
unique and valuable IPs and do not involve the undertaking of substantial risk
or do not create substantial risk to the service provider. Transactions will be
considered to be at arm’s length provided that the minimum mark-up applied is 5% of the costs incurred. For the receipt of services
acceptable markup should not exceed 5% on the relevant expenses.
A
company that opts safe harbours for the transactions in categories 1, 2 and 3
above will need to prepare the following additional documentation and support:
a)
Brief description of the functional
analysis (functions, assets, risks).
b)
Description of the profile of the
entity based on the functional analysis.
c)
Detailed description of the loans for
which the simplification measures are applied (dates of the agreements,
amounts, balances at the end of the tax year, date of repayment, collaterals,
interest rates, details of any amendments).
d)
Description of the reasons that
explain/ justify that the transactions are eligible under the simplification
measures (as applicable for each transaction).
e)
Preparation of calculations,
reconciliations and explanations in respect of the application of the
simplification measures on the controlled transactions for the purpose of
determination of taxable profit.
A
company that opts safe harbours for the transactions in category 4 above will
need to prepare the following additional documentation and support:
a)
Brief description of the functional
analysis (functions, assets, risks).
b)
Description of the profile of the
entity based on the functional analysis.
c)
Description of categories of low value
adding services provided/received.
d)
IDs of the beneficiaries.
e)
Description of the reasons that
justify how each category of such services qualifies as low value-adding
service.
f)
Description of selected allocation
keys for expenses and relevant workings in regard to their application.
g)
Calculations that support allocation
of relevant costs on which mark-up is applied.
h)
Preparation of calculations,
reconciliations and explanations in respect of the application of the
simplification measures on the controlled transactions for the purpose of
determination of taxable profit.
Reporting
Entities
that opt for safe harbour rules for eligible transactions must declare it to
the Tax Department by completing the relevant section on the annual income tax
return.
The
minimum documentation as explained in the Circular must be provided to the Tax
Department within 60 days from request.
It
is noted that election of safe harbour rules in respect of cross border
transactions shall trigger reporting obligation under DAC6 (with the exemption
of the safe harbour on low value adding services).
