Cyprus and the new Transfer Pricing Legislation

Within 2021, Cyprus will become the latest European country to introduce transfer pricing legislation into its income tax law. This will mark a new era in the way Cypriot corporations calculate their tax base, since transfer pricing is, in essence, a mechanism that divides the overall business profit of a group amongst its various companies. To date, Cyprus has had no detailed transfer pricing legislation included in its income tax law. The tax law was first introduced in 1941 by the British Colonial Governor in Cyprus (Sir William Denis Battershill) and made no reference to any transfer pricing provisions. It was not until 2002 that the legislation was amended and a specific ‘arm’s length’ provision was incorporated therein, despite there being no guidance on how to apply it. Later, in 2017, a detailed transfer pricing circular (based on OECD transfer pricing guidelines) was issued by the tax authorities governing (only) certain financing transactions.

Moving on to 2021, new Transfer Pricing Legislation is expected to be enacted that will require domestic and international transactions between associated persons to be in line (for tax purposes) with the ‘arm’s length’ principle as mentioned in Article 9 of the OECD Model Tax Convention and as explained in the OECD Transfer Pricing Guidelines of 2017. Such transfer pricing rules will effectively require companies to perform transfer pricing studies and documentation subject to a few exemptions.

The 2021 Transfer Pricing legislation marks a new era in the Cyprus tax system, whereby specialisation in tax law is required in applying the OECD tax treaty rules and transfer pricing guidelines to satisfy the ‘arm’s length’ principle.

Given that Cypriot income tax law will endorse the OECD transfer pricing guidelines, taxpayers – and, more importantly, tax advisors – will have to comprehend over 600 pages of such guidelines in addition to the regularly updated OECD rules and other transfer pricing reports. The latest OECD transfer pricing guidelines incorporated all the BEPS actions 8-10, resulting in amendments that needed to be accounted for, such as those on how to accurately delineate a transaction, on the intangibles and on risk allocations issues. The two most recent OECD reports on transfer pricing were issued in 2020 and concerned financing transactions and guidance on the transfer pricing implications of the COVID-19 pandemic.

It is also expected that revenue audits will be undertaken by officers who are equipped with the requisite knowledge, data analysis and experience to deal with the difficulties in applying the ‘arm’s length’ principle. This reveals the importance of preparing a well-supported transfer pricing study to mitigate tax risks. We strongly advise clients and other interested parties to review their current group structures and to contact Taxand Cyprus for more information, in order to obtain assistance in determining the impact of the changes and to discuss possible solutions. At Taxand Cyprus, we provide tailored services to meet our clients’ transfer pricing needs and requirements. These include helping you to understand how the new transfer pricing legislation impacts your business, identifying the most appropriate transfer pricing methodology, conducting benchmarking analysis to define the ‘arm’s length’ rate, providing training to your staff, and assisting you in designing an effective and efficient business model.

Over the years, our tax team has accumulated a wealth of transfer pricing experience and assisted numerous clients in Europe to address their transfer pricing needs. We also work with our international association members from Taxand, which enables us to provide you with a comprehensive approach to your transfer pricing obligations and opportunities worldwide.

Our Transfer Pricing experts are also part of the “Transfer Pricing Global Guide by Thompson Reuters” team, providing a global insight from leading professionals into comparative guides to transfer pricing worldwide. Our Transfer Pricing team has multi-year tax advisory experience of Transfer Pricing projects across South East Europe and the Middle East and is ready to advise companies on how to efficiently deal with the current and upcoming legislation in Cyprus.

Our team of advisors can assist you to:
• Prepare the Transfer Pricing study
• Defend your Transfer Pricing policy
• Design and implement the Transfer pricing model that suits your business
• Review and localize the Group master file
• Achieve compliance with each country’s legislation

Christos Theophilou T: +357 22 875 720

Costas Savva
T: +357 22 875 720

Demis Ioannou
T: +357 22 875 720

The article appears in Gold magazine.