It is probable that, while you are reading this article, Cyprus is already the latest European country to introduce transfer pricing legislation in its income tax law with effect from the 1st of January 2021.
This introduction will mark a new era of how Cypriot corporations shall calculate their tax base: transfer pricing, in essence, is a mechanism that divides the overall business profit of a group amongst the 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 up until 2002, when the legislation was amended and a specific “arm’s length” provision was incorporated therein, despite there being no guidance on how to apply it. Further on, in 2017, a detailed transfer pricing circular (based on the OECD transfer pricing guidelines) was issued by the tax authorities governing (only) certain financing transactions.
- 1941 First Introduction Of Income Tax Law In Cyprus
- 2002 A Specific Arms Length Provision Was Incorporated Into Income Tax Law
- 2017 Tax Office Issued A Circular For Transfer Pricing Financing Activities Based On The OECD Transfer Pricing Guidelines
- 2021 A Full Transfer Pricing Legislation Based On The OECD Transfer Pricing Guidelines Is To Be Enacted By The Cypriot Parliament
Moving on to 2021, a 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 by 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.
Key Take Away
The 2021 new Transfer Pricing Legislation marks a new era in the tax system of Cyprus. Specialization in the tax law arena is required in both applying the OECD tax treaty rules and transfer pricing guidelines to satisfy the “arm’s length” principle.
With the understanding that the 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 concerning 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 already 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 us for more information in order to provide assistance in determining the impact of the changes and to discuss possible solutions.
Over the recent years, our tax team has accumulated a wealth of transfer pricing experience and assisted an extensive list of clients, including Fortune 100 companies, to address their transfer pricing needs. We also work with other Taxanders who enable 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 in comparative guides to transfer pricing worldwide. Our Transfer Pricing team has -a long-term tax advisory experience on 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.
Dealing extensively with Transfer Pricing for the last 10-12 years, Taxand Cyprus currently represents the most experienced Transfer Pricing Firm in Cyprus.
Taxand is the world’s largest independent tax organization offering practical, expert-led advice. We do tax and only tax. No audit or attest issues. That’s why we can focus entirely on advising and supporting you to adopt best practices, to become more cost-efficient and to reduce the burden that tax issues bring.
At Taxand, 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.
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 the country’s legislation
Today, Taxand Cyprus leverages on the experience and depth of both Taxand and Taxand Cyprus by providing to its combined clientele more attorneys, more accountants, and increased knowledge. As a very important player in the market, Taxand Cyprus aims to influence more broadly how tax law is practiced in the island
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