Cyprus Tax Department issues new rules regarding intra-group financing arrangements: The Cyprus Tax Department (“CTD”) has recently issued a Circular regarding the new rules for the taxation of intra-group financing arrangements applying from 1 July 2017. The new Circular as in line with the OECD provides for the application of transfer pricing methodology to such activities based on the arm’s length principle. It is worth noting that the application of the pre agreed minimum profit margins (of 0.125% to 0.35%) for “back to back loans” has now been terminated.
Cyprus Tax Department issues new rules regarding intra-group financing arrangements: Scope
The Circular is applicable to intra-group financing activities where loans are granted by a company to related parties provided that the fall within the scope of Section 33 of the Income Tax Law, financed by means such as loans, cash advances, bank loans and debentures.
Transfer pricing requirements
A company wishing to finance another related entity will need to determine its remuneration on the basis of transfer pricing principles.
The company shall identify all commercial and financial transactions with related parties and determine the economically significant conditions and circumstances relating to such transactions.
The Company that wishes to facilitate by financing a related party which bears the risks must have the financial capacity to manage and bear those risks by having sufficient level of equity to bear the financial consequences of its risks.
As per the Circular, financing companies must have an actual presence in Cyprus and have controlling functions present to control the risks and transactions entered into.Important factors taken into account are the number of Directors that are Cyprus tax residents and the number of board of Directors’ meetings as well as shareholders’ meetings held in Cyprus.
A financing company which meets the aforementioned requirement shall 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 and shall be regularly reviewed by the Tax Department based on relevant market analyses.
Exchange of information
All of the above are subject to the exchange of information rules set under the Directive on Administrative Cooperation.
Entry into force
The Circular is applicable as from the 1st of July 2017, for all existing and future transactions.
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