Who is obliged to prepare the SIT?

The SIT reporting obligation is applicable for all Taxpayers who have transactions between related parties on an annual basis.

When is the deadline for preparation and submission of the Local File?

The SIT shall be submitted to the Tax Department, via Tax For All (TFA) portal concurrently with the income Tax Return

PENALTIES

What is the penalty for not submitting the SIT on time?

The penalty for non-submission of the SIT by the deadline as provided in the Regulations (e.g., the submission deadline of the income tax return) is €500.

When are companies related?

(1) If the same person has, directly or indirectly, at least 25% of the voting rights or of the share capital or is entitled to at least 25% share of the income of both companies

(2) lf the same person and persons connected with that person holds, directly or indirectly, at least 25% of the voting rights or of the share capital or are entitled to at least 25% share of the income of both companies.

(3) If a group of two or more persons holds, directly or indirectly, at least 25% of the voting rights or of the share capital or are entitled to at least 25% share of the income of each company and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either groups replaced by a person with whom that person is connected.

When is a company connected/related with a person?

(1) A company is connected with another person if this person holds, directly or indirectly, at least 25% of the voting rights or of the share capital or is entitled to at least 25% share of the company’s income or if that person and persons connected with him together holds, directly or indirectly, at least 25% of the voting rights or of the share capital or are entitled to at least 25% share of the company’s income.

(2) Any two or more people acting together to secure, directly or indirectly, at least 25% of the voting rights or of the share capital or are entitled to at least 25% share of the company’s income shall be treated in relation to that company as connected with one another and with any person acting on the directions of any of them to secure directly or indirectly at least 25% of the voting rights or of the share capital or is entitled to at least 25% share of the company’s income.

What should a taxpayer do if it has transactions between connected/related persons?

In accordance with the new provisions of the Income Tax Law, connected persons which are tax residents in Cyprus, or permanent establishments in Cyprus of non-tax resident persons (Liable Taxpayers) have the obligation to prepare:

(1)  a ΤΡ documentation file and

(2) a Summary of Information Table (SIT) for transactions falling within the ambit of Section 33 of the Income Tax Law (e.g., intercompany transactions).

What is a TP documentation file?

The TP documentation file consists of:

• The Master File
• The Cypriot (local) file

MASTER FILE

What is the Master File?

The master file contains standardized information relevant for all group members of a multinational enterprise (ΜΝΕ). More specifically, the Master File should provide an overview of the ΜΝΕ group business, including the nature of its global business operations, its overall transfer pricing policies, and its global allocation of income and economic activity in order to assist tax administrations in evaluating the presence of significant transfer pricing risk. In general, the master file is intended to provide a high-level overview in order to place the ΜΝΕ group’s transfer pricing practices in their global economic, legal, financial and tax context.

Who is obliged to prepare the Master File?

The master file obligation is applicable for Liable Taxpayers when they act as the Ultimate Parent Entity (UPE) or Surrogate Parent Entity (SPE) for Country-by-Country Reporting purposes, as defined in the Administrative Cooperation in the field of Taxation Law.

More specifically, a master file obligation will arise for Liable Taxpayers if both of the below

conditions are met:

(1) The taxpayer is part of an ΜΝΕ Group with a Country-by-Country Reporting obligation (e.g., with consolidated revenue above €750 million) AND

(2) The taxpayer is either the Ultimate Parent Entity (UPE) or the Surrogate Parent Entity (SPE).

When is the deadline for preparation and submission of the Master File?

The master file must be prepared together with the income tax return for the respective tax year ( e.g. 15 months after calendar year-end).

The master file must be made available by the liable Taxpayer at any time after the preparation deadline and submitted to the Tax Department upon request within 60 days.

When should the Master File be updated?

The master file is to be updated annually, and specific reference made to any significant changes of the market conditions that may impact the information and data included in the master file.

Cypriot File (Local File)

What is the Local File?

The local file refers specifically to material transactions of the local taxpayer. In contrast to the master file, which provides a high-level overview as described above, the local file provides more detailed information relating to specific intercompany transactions and helps to meet the objective of assuring that the taxpayer has complied with the arm’s-length principle for its material transfer pricing positions.

The local file focuses on information relevant to the transfer pricing analysis related to transactions taking place between connected parties (as defined in Section 33 of the Income Tax Law). Such information would include relevant financial information regarding those specific transactions, a comparability analysis, and the selection and application of the most appropriate transfer pricing method.

Who is obliged to prepare the Cypriot (Local) File?

The obligation to prepare the local file is applicable for Liable Taxpayers if their transactions with connected persons either exceed (or should have exceeded based on the arm’s-length principle) the amount of €1,000,000 in aggregate per category of transaction per tax year except financing activities for which the threshold has been increased to €5,000,000.

This means that in case a taxpayer has several transactions between connected persons but if separated per category they do not exceed €1,000,000 per year, then there is no obligation to prepare the local file.

Review of Cypriot (Local) File

The local file should be subject to Quality Assurance Review by a person who has a practicing certificate of ICPAC or any other recognized institute of certified accountants in Cyprus.

When is the deadline for preparation and submission of the Local File?

The local file must be prepared until the deadline for submission of the income tax return for the respective tax year ( e.g. 15 months after calendar year-end).

The local file is to be made available by the Liable Taxpayer at any time after the preparation deadline and submitted to the Tax Department upon request within 60 days.

When should the Local File be updated?

The local file is to be updated annually, and specific reference made to any significant changes of the market conditions that may impact the information and data included in the local file.

PENALTIES

What is the penalty for not submitting the TP documentation?

The ΤΡ documentation file is to be submitted to the Tax Department, upon request, within 60 days.

lf the ΤΡ documentation file is submitted after the 60th day, the penalties are as follows:

• If submitted between 61 and 90 days, the penalty is €5,000
• lf submitted between 91 and 120 days, the penalty is €10,000
• If not submitted or submitted after the 120th day, the penalty is €20,000

The anti-tax avoidance measures which were voted are:

1. Interest limitation rule
2. General anti-abuse rule
3. Controlled Foreign Company rule
4. Exit taxation
5. Rule to tackle hybrid mismatches

The application dates for the above are:

1 January 2019: Interest limitation rule, general anti-abuse
rule and controlled foreign companies rule.

1 January 2020: Exit taxation and rule to tackle hybrid
mismatches (reverse hybrid rules shall apply by 1 January 2022).

As from 1 July 2017, the new framework will apply to these and certain other financing arrangements.

On 30 June 2017, the Tax Department has issued a circular regarding the new framework. The Circular applies to intra-group financing activities where loans are granted by a company (“financing company”) to related parties (definition under the Income Tax Law art. 33), financed by financial means and instruments such as private loans, cash advances, bank loans etc.

Transfer pricing

A financing company will be required to determine its remuneration on the basis of transfer pricing principles. This means that the company will need to identify each commercial and financial relationship with the related parties (“controlled transactions”) and to determine the economical and significant conditions and circumstances relating to such transactions.

An analysis is required of the functions performed, assets used and risks assumed by the financing company.

An underlying principle of the risk analysis is that a financing company bearing risks, must have the financial capacity to manage those risks and bear the financial consequences id the risks assumed actually materialise. Therefore, the company is expected to determine the appropriate level of equity that would be needed to assume the risks. In case the financing company is a credit/financial institution or an investment firm, it is deemed to have a sufficient level of equity to bear the financial consequences of its risks.

In addition, an appropriate comparability analysis must be carried out in order to determine whether the remuneration resulting from the transactions between the related parties are comparable to transactions between independent parties under similar circumstances in the open market. The Circular indicates that in the case of companies performing functions similar to those of regulated financing and treasury companies, a return on equity of 10% after tax can be considered as reflecting an arm’s length remuneration. This percentage will be regularly reviewed by the Tax Department based on relevant market analyses.

Substance

The Circular indicates that financing companies must have an actual presence in Cyprus and  qualified personnel to control the risks and transactions entered into. The financing company is considered to control the risk if:

• it has the decision making power to enter into a risk-bearing commercial relationship
• it has the ability to address such risks
• it actually performs such decision-making functions

The actual presence criteria taken into account are:

• the number of directors that are Cyprus tax residents
• the number of board of directors meetings held in Cyprus
• the number of shareholders meetings held in Cyprus

The daily activities of risk mitigation can be outsourced to third parties as long as the company has the capability to take, and actually make, the key decisions with respect to the outsourcing.

Transactions without commercial rationale

Transactions that cannot be observed on the open market and do not have any commercial rationale must be disregarded to ensure full compliance with the arm’s length principle.

Minimum requirements

The minimum requirements for the transfer pricing analysis are:

• a description of the computation of equity allocation required to assume the risks
• a description of the group and the inter-linkages between the functions performed by the entities participating in the controlled transactions and the rest of the group, together with a description of the value creation within the group by the entities participating in the transactions
• the precise scope of the transactions analysed
• a list of the searched potentially comparable transactions
• a rejection matrix for rejected potentially comparable transactions with justifications
• the final list of comparable transactions which have been selected and used to determine the arm’s length price applied to the intra-group transactions accurately delineated
• a general description of market conditions
• a list of all previous agreements on transfer pricing concluded with other countries in relation to the transactions in question
• a list of all the previous agreements concluded with entities under analysis which are still in effect at the time of the submission of the request
• a projection of the income statements for the years covered by the request

Simplification regime

A financing company which meets the substance requirements and is engaged in purely intermediary financing activities, borrowing from related entities and lending to related entities, will be deemed for the sake of simplification to comply with the arm’s length principle if it receives in relation to its controlled transactions a minimum return of 2% after tax on assets.

An entity which meets the criteria and does not intend to prepare transfer pricing documentation may choose to benchmark its remuneration based on this minimum return on assets approach. The 2% will be regularly reviewed by the Tax Department.

Submission of transfer pricing analysis

The Tax Department expects that the transfer pricing analysis will be submitted to the Tax Department by auditors, who are required to carry out an assurance quality control in order to confirm the quality of the transfer pricing analysis.