On April 3, 2024, the Cyprus Tax Department published a new set of FAQs (from 17 to 24), aimed at clarifying specific aspects of Articles 33 and 33C of the Income Tax Law (ITL). These articles pertain to the Transfer Pricing legislation adopted by Cyprus starting 01 January 2022. This transfer pricing alert article includes the questions and their answers as they appear on the Tax Department's website. It is anticipated that more questions will be added to the FAQs in the future.
Question 1
If the controlled transactions in Category "A"
cumulatively exceed €750,000 or shall exceed €750,000 on
the basis of the arm's length principle as described in Article
33(9)(a) of the ITL and at the same time the controlled
transactions in Category "B" cumulatively do not exceed
the €750,000 threshold in a tax year, is there an obligation
to include the controlled transactions of Category "B" in
the Cyprus Local File?
Answer 1
No, there is no obligation to include Category's "B"
controlled transactions in the Cyprus Local File. Only the
controlled transactions of a category which cumulatively exceed or
shall exceed €750,000 on the basis of the arm's length
principle during a tax year must be documented and analysed in the
Cyprus Local File. In this specific example, it will be
Category's "A" controlled transactions only.
Question 2
How is the €750,000 threshold being determined in the context
of rental income activities during each tax year?
Answer 2
The threshold is determined by reference to the total rental income
on the basis of the arm's length principle in a tax year.
Question 3
Do purchases and sales need to be aggregated for the purposes of
assessing whether the threshold has been exceeded?
Answer 3
Yes, the threshold is based by reference to the absolute values of
the controlled transactions for each category occurring in a tax
year. For example, if total purchases and total sales amount to
€400,000 and €500,000 respectively, the cumulative amount
in this category is €900,000. Thus, the threshold in this
category has been exceeded.
Question 4
Is the Cyprus Local File and Summary Information Table (SIT)
prepared using the tax year or the accounting year of the
company?
Answer 4
The Cyprus Local File and SIT are prepared with respect to the tax
year.
Question 5
Under which category of the SIT should Financial Guarantees be
reported?
Answer 5
Financial Guarantees should be reported under the category
"Financial Transactions".
Question 6
Should a Transfer Pricing study be prepared every tax year or only
if something changes with regards to the intra group loans?
Answer 6
A Transfer Pricing study should be prepared when an intra group
loan is initiated and updated when: i. new loans are provided or
received by the company, or ii. significant terms of the existing
loans change or amended, or iii. the functional profile of the
company changes, or iv. the market and economic conditions change
significantly (if applicable). The above list is indicative and not
exhaustive. Further guidance is provided in the OECD TP Guidelines.
Please note that in accordance to Article 33(10) of the ITL, the
master file (where applicable) and the Local File shall be updated
every tax year.
Question 7
Who is responsible for the completion and the submission of the
SIT?
Answer 7
It is the responsibility of the taxpayer to complete the SIT. The
SIT shall be submitted by the Statutory Auditor or Tax
Consultant.
Question 8
Is the Circular dated 30/06/2017 with title "Tax treatment of
intra group back-to-back financing transactions" still
applicable following the enactment of the new TP Legislation and
Regulations?
Answer 8
The Back-to-Back Circular was abolished as from 01/01/2022. Q8 KPMG
Cyprus observation The Back-to-Back Circular was abolished by the
Circular 1/2023 dated 5/1/2023 with application as from
01/01/2022.
Question 9
Q10 How is the €750,000 threshold in the context of loan
financing activities being determined in a tax year?
Answer 9
The threshold in the category of loan financing transactions is
determined only by reference to the loan principal including
interest charged but not paid.
Question 10
Continuing form Q9 above, which balance is relevant in the case of
loan financing activities (e.g. year end, average balance for the
year, facility amount)?
Answer 10
The maximum loan balance (i.e. only the loan principal including
interest charged but not paid) during the tax year should be used
to determine the threshold in the respective tax year and be
reported in the SIT.
Question 11
Should the loans or any other monetary facilities including cash
withdrawals (but excluding any balances arising from commercial
transactions) granted by companies to the persons described in
Article 5(1) & 5(2)(z) of the Income Tax Law L. 118(I)/ 2002 be
taken into account for the purposes of assessing whether the
threshold of €750,000 has been exceeded in the category of
financing activities?
Answer 11
No, provided the company which is granting the loans or any other
monetary facilities including cash withdrawals to its directors or
to its shareholders who are individuals or their spouses or to
their relatives up to and including the second degree of kinship
does not have as a taxable activity the provision of financing. In
the specific case only, such balances should not be taken into
account for the purposes of assessing whether the threshold of
€750,000 has been exceeded in the category of financing
activities and as such not be reported in the SIT. No documentation
with respect to these specific transactions in the Local File is
required.
Question 12
Company A borrows from a related Company B or a related individual
B, the amount of €1,000,000 to buy shares of the same amount.
The shares with acquisition cost of the amount of €1,000,000
fall under the definition of "titles" as per Article 2 of
the Income Tax Law L. 118(I)/2002 and circular 2008/13. Should the
transaction as described above: 1. Be documented in the Cyprus
Local File? 2. Be excluded from the SIT?
Answer 12
In the case of Company A only (i.e., the Borrower), the transaction
shall not be documented in the Cyprus Local File, and it shall be
excluded from the SIT to the extent that the interest incurred does
not constitute a tax deductible expense in accordance to the
provisions of Articles 11(15) and 11(16) of the Income Tax Law L.
118 (I)/ 2002 and any other related Tax Circular that is in
force.
Question 13
A taxpayer has controlled transactions in Category "A"
which cumulatively exceed €750,000 in a tax year, or should
exceed €750,000 on the basis of the arm's length principle
as stipulated in Article 33(9)(a) of the Income Tax Law L.
118(I)/2022, as amended, such that the said transactions in
Category "A" need to be documented in a Local File and at
the same time the taxpayer in that tax year has controlled
transactions in Category "B" which cumulatively do not
exceed or should not exceed the €750,000 threshold on the
basis of the arm's length principle. Does Circular 06/2023
apply to the Transactions in Category "B" in that tax
year?
Answer 13
Yes, Circular 06/2023 is applicable to the transactions in Category
"B" in that tax year and thus the taxpayer should either:
a) prepare simplified Transfer Pricing documentation with the
contents as described in the Circular 06/2023 or b) opt for a safe
harbor and maintain the prescribed supporting documentation in
respect of the use of the safe harbor provided that the controlled
transactions in Category "B" belong to one of the
subcategories of transactions for which a safe harbor is available
under the circumstances permitted in the Circular 06/2023. Please
refer to Circular 06/2023 which was published on 6 July 2023 for
further details.
Question 14
Do all persons as defined in Article 33(7) of the ITL need to
complete the SIT of Controlled transactions and submit it
electronically every tax year together with the Income Tax Return
as per Article 33(10) of the ITL?
Answer 14
Yes. All persons as defined in Article 33(7) of the Income Tax Law
need to complete and submit the SIT of Controlled Transactions as
long as controlled transaction(s) arise within a tax year and
irrespective of the value of the said controlled
transaction(s).
Question 15
When is the submission deadline of the SIT for the year 2022?
Answer 15
The deadline for the submission of the 2022 SIT is 30 November 2024
at 23:59.
Question 16
How can the SIT be submitted to the Tax Department?
Answer 16
The SIT shall be submitted electronically only through the
taxpayer's gate Tax For All.
New FAQs
Question 17
What is the format of the SIT?
Answer 17
The format of the SIT can be viewed via the taxpayer's gate Tax
For All.
Question 18
Should the sale of shares or other securities between related
persons that fall under the definition of "titles" as per
Article 2 of the ITL and Circular 2008/13 be reported in the SIT
and be taken into account for the purposes of assessing whether the
applicable Local File threshold is exceeded?
Answer 18
No. In this specific case only, such transactions shall NOT: (a) be
taken into account for the purposes of assessing whether the
threshold of Article 33(7) of the ITL has been exceeded or (b) be
reported in the SIT or (c) be documented in the Local File / or
satisfy the minimum TP documentation (if applicable). For the
treatment of Trade Receivables and Other Receivables arising from
such transactions, please refer to Questions 19, 20 and 21.
Question 19
9Should balances of trading nature (i.e., Trade Receivables and
Trade Payables) between related persons be reported in the SIT and
be taken into account for the purposes of assessing whether the
applicable Local File threshold is exceeded?
Answer 19
No. Such balances should not be reported in the SIT provided that
the terms of such Trade Receivables and Trade Payables between two
related parties do NOT differ from those which would be made
between two independent parties and as such they are not considered
to be of financing nature. Trade Receivable or Trade Payable
balances of trading nature (but not of financing nature) shall NOT:
(a) be taken into account for the purposes of assessing whether the
Local File threshold of Article 33(7) of the ITL is exceeded or (b)
be reported in the SIT or be documented in the Local File / or meet
the minimum TP documentation (if applicable).
Question 20
Do Trade Receivables or Other Receivable balances (for example long
outstanding balances) between related persons that are considered
to be balances of financing nature (i.e., not of trading nature)
have to be reported in the SIT and be taken into account for the
purposes of assessing whether the applicable Local File threshold
is exceeded?
Answer 20
Yes. Trade Receivable balances or Other Receivable balances of a
financing nature shall: (a) be taken into account for the purposes
of assessing whether the Local File threshold of Article 33(7) of
the ITL is exceeded, and (b) be reported in the SIT and be
documented in the Local File / meet the minimum TP documentation
(if applicable).
Question 21
What amount needs to be reported in the SIT in relation to Trade
Receivable or Other Receivable balances between related persons
which are considered to be balances of financing nature?
Answer 21
The maximum balance during the reported year of such Trade
Receivable or Other Receivable balances shall be included in the
SIT for the purposes of assessing whether the applicable Local File
threshold of Article 33(7) of the ITL is exceeded.
Question 22
Qualifying Owners, Qualifying Charterers and Qualifying Ship
Managers as per section 6, 18 and 28 of the Merchant Shipping (Fees
and Taxing Provisions) Law 44(I)/2010, as amended, engage in
Qualifying Shipping Activities which are subject to tonnage tax.
Should controlled transactions arising from a Qualifying Shipping
Activity that is subject to tonnage tax be reported in the SIT and
be taken into account for the purposes of assessing whether the
applicable Local File threshold is exceeded?
Answer 22
No. The taxable Income arising from a qualifying shipping activity
between two related persons who are both subject to tonnage tax
shall NOT: (a) be taken into account for the purposes of assessing
whether the applicable Local File threshold of Article 33(7) of the
ITL is exceeded or (b) be reported in the SIT or (c) be documented
in the Local File / meet the minimum TP documentation (if
applicable).
Question 23
Party A (Qualifying Owner, Qualifying Charterer and Qualifying Ship
Manager as per section 6, 18 and 28 of the Merchant Shipping (Fees
and Taxing Provisions) Law 44(I)/2010, as amended) engage in
Qualifying Shipping Activity which is subject to tonnage tax. Party
B's activities are subject to Income Tax. Should controlled
transaction arising from a Qualifying Shipping Activity between
Party A and Party B (the latter business income is subject to
Income Tax) be reported in the SIT and be taken into account for
the purpose of assessing whether the applicable Local File
threshold is exceeded?
Answer 23
Only Party B's income which is subject to Income Tax shall: (a)
be taken into account for the purposes of assessing whether the
applicable Local File threshold of Article 33(7) of the ITL is
exceeded or (b) be reported in the SIT or (c) be documented in the
Local File / meet the minimum TP documentation (if applicable).
Question 24
Qualifying Owners, Qualifying Charterers and Qualifying Ship
Managers as per section 6, 18 and 28 of the Merchant Shipping (Fees
and Taxing Provisions) Law 44(I)/2010, as amended, earned income
from a Non-Qualifying Shipping Activity which is subject to Income
tax. Should controlled transactions arising from a Non-Qualifying
Shipping Activity which is subject to Income tax be reported in the
SIT and be taken into account for the purposes of assessing whether
the applicable Local File threshold is exceeded?
Answer 24
Yes. Any income generated from a controlled transaction in relation
to a non-qualifying shipping activity by the Qualifying Owners,
Qualifying Charterers and Qualifying Ship Managers as per the
provisions of the Merchant Shipping Law 44(I)/2010, as amended
shall: (a) be taken into account for the purposes of assessing
whether the applicable Local File threshold of Article 33(7) of the
ITL is exceeded and (b) be reported in the SIT and (c) be
documented in the Local File / meet the minimum TP documentation
(if applicable).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.