Revised thresholds for transfer pricing documentation

On February 1, 2024, the Cyprus Tax Department announced significant updates to the compliance obligations regarding the preparation of the Cyprus Local File for intercompany transactions. These changes, specifically targeting the thresholds that dictate the necessity for such documentation, pertain to Section 33 of the Income Tax Law (ITL) concerning intercompany transactions. The adjustments are set to be enforced from the tax year 2022 onwards.

Detailed Examination of the Revised Thresholds

Under the ITL’s current framework, the obligation to prepare a Cyprus Local File becomes applicable to connected entities that are either tax residents in Cyprus or are permanent establishments in Cyprus belonging to non-tax residents (hereinafter referred to as Liable Taxpayers). This requirement is triggered when their intercompany transactions exceed, or are expected to exceed based on the arm’s-length principle, certain thresholds. These thresholds are assessed in aggregate per category of transaction for each tax year.

Following constructive dialogues with various stakeholders, including the Ministry of Finance, a consensus was reached to amend these thresholds significantly. The adjustments are as follows:

  • For transactions categorized under “Financing,” the threshold has been elevated from €750,000 to €5 million.
  • For transactions across other categories, including “Goods,” “Services,” “Royalties and Other Intangibles,” and “Other,” the threshold has been raised from €750,000 to €1 million.

These changes are tailored to streamline compliance and reflect the outcomes of recent discussions with interested parties. They mark a pivotal shift in the tax compliance landscape for the tax year 2022, with the formal amendment to the ITL anticipated to follow suit at a subsequent date.

Conclusion and Implementation

The revision of these thresholds represents a significant development in the regulatory environment for businesses operating within Cyprus. By adjusting these limits, the Cyprus Tax Department aims to refine the compliance process, making it more manageable for Liable Taxpayers engaging in intercompany transactions. Stakeholders are encouraged to take note of these changes and prepare accordingly for their implementation in the tax year 2022.

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