Transfer Pricing and the Arm’s Length Principle

Arm’s Length Principle

In Cyprus, the arm’s length principle is established under Article 33 of the Income Tax Law. This principle stipulates that transactions between associated entities should be conducted under conditions and terms that would be prevalent between independent entities under similar circumstances. This ensures that transfer prices among related entities are set as if the entities were independent, preventing tax avoidance through profit shifting.

Transfer Pricing Documentation Requirements

Effective from 1 January 2022, Cyprus has implemented comprehensive transfer pricing documentation requirements. These requirements are detailed as follows:

  • Local File: A Cyprus Local File must be maintained by taxpayers if the aggregated value of transactions with related parties exceeds €750,000 per category of transactions within a tax year. These categories include transactions related to goods, services, intellectual property (IP) related income, financial transactions, and other types.
  • Master File: Taxpayers that act as the Ultimate Parent Entity or Surrogate Parent Entity of a Multinational Enterprise (MNE) Group, with consolidated group revenues exceeding €750 million, are required to maintain a Master File. This file provides a comprehensive overview of the MNE group’s global business operations and transfer pricing practices.
  • Simplified Documentation: Taxpayers with related party transactions that do not meet the criteria requiring a Local File must still maintain simplified transfer pricing documentation.
  • Summary Information Table (SIT): All taxpayers must prepare and submit a SIT, which includes high-level information about related party transactions, such as the identity of the counterparties, their tax residency jurisdictions, and the value of the transactions.

These documentation rules apply to all Cyprus tax resident companies and permanent establishments of non-resident companies.

Reporting Deadlines and Compliance

Transfer pricing documentation, including the Local File, Master File, and simplified documentation, must be prepared by the due date for submitting the taxpayer’s Corporate Income Tax Return for that tax year. Upon request from the Cyprus Tax Department, this documentation must be made available within 60 days of receipt of the request. The SIT should be prepared annually and submitted alongside the Corporate Income Tax Return.

Penalties for Non-Compliance

Failure to comply with documentation requests from the Cyprus Tax Department can result in significant penalties. If a taxpayer does not provide the required documentation within 60 days of a request, penalties range from €5,000 to €20,000, depending on the delay. Additionally, failure to submit a SIT incurs a penalty of €500.

These regulations enhance transparency and compliance in pricing practices across international borders and help align Cyprus with international efforts to curb tax base erosion and profit shifting (BEPS).

Disclaimer

Please note that the information provided here is for general guidance only and does not constitute professional tax advice. Tax laws and interpretations are subject to change, and individual circumstances can significantly affect tax obligations and benefits.

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For personalized tax advice tailored to your specific situation, we strongly recommend consulting with a qualified tax professional. Our team is equipped with the expertise to navigate the intricacies of Cyprus tax law and provide you with customized solutions. Contact us to ensure that you are making the most informed decisions for your tax-related matters.

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