Introduction
Reforms to ITL section 33
Documentation requirements
Penalties for non-compliance
Comment
On 30 June 2022, the House of Representatives passed Law 101(I)/2022 to align the Income Tax Law 2002 (ITL), as amended, with the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The Law is for multinational enterprises and tax administrations and addresses areas relevant to the rules governing the arm's length principle (ALP). The Law and the guidelines also impose documentation requirements to Cypriot tax residents and to permanent establishments of non-tax resident entities for certain transactions undertaken with related parties (ie, controlled transactions).
The Assessment and Collection of Taxes Law 1978 has also been amended to introduce penalties for non-compliance with the new transfer pricing documentation requirements.
The Law applies retroactively from 1 January 2022.
Prior to the Law, the ALP under section 33 applied to transfer pricing related issues, with no further guidance as to how to practically apply it. Section 33 has now been amended to provide guidance on the instances where taxpayers will be deemed as connected by incorporating the 25% relationship test.
An entity is deemed to be connected to another entity:
- if the same individual (including persons connected to them) directly or indirectly:
- holds 25% of the voting rights or share capital; or
- is entitled to a share of at least 25% of the income of both companies; or
- where a group of two or more persons directly or indirectly:
- holds 25% of the voting rights or share capital; or
- is entitled to a share of at least 25% of the income of each company where the groups either consist of the same persons or are deemed to consist of the same persons.
An entity is deemed to be connected with another person if the same individual (including persons connected to them) directly or indirectly:
- holds 25% of the voting rights or share capital; or
- is entitled to a share of at least 25% of the company's income.
Two or more persons who act together to secure directly or indirectly at least 25% of the voting rights or share capital, or that are entitled to a share of at least 25% of the company's income, are considered (in relation to the said company) to be connected with one another and with any person:
- acting on their instructions to secure directly or indirectly at least 25% of the voting rights or share capital; or
- who is entitled to a share of at least 25% of the company's income.
Transfer pricing documentation requirements where taxpayers meet the conditions under the 25% relationship test are subject to minimum thresholds.
Taxpayers will be under the obligation to provide a transfer pricing study and a summary information table (SIT) of controlled transactions. The study will consist of the basic documentation file for prices of controlled transactions (the master file) and the Cyprus documentation file for prices of controlled transactions (the local file).
They will be under a twofold obligation subject to two exemptions. There will be no obligation to:
- prepare a local file, if the controlled transactions cumulatively per category do not exceed or would not exceed, according to the ALP, €750,000 per tax year; or
- provide a master file if they are not the ultimate parent entity or surrogate parent company.
The SIT with the audited transactions for each tax year and the income statement must be submitted electronically to the Department of Taxation and must include clarification that the ALP shall be applied and interpreted in accordance with the OECD guidelines. There is also the option to submit an advanced pricing arrangement (APA).
A taxpayer has the right to submit to the commissioner of taxation an application for an APA with their specific controlled transactions that are either in progress or to be carried out in the future. The details on the process of submitting and processing an APA application may be determined by regulations issued by the Council of Ministers. Further, the commissioner of taxation may, by notification published in the Official Gazette of the Republic, determine more specific content of the APA.
The amended section 50F of the Assessment and Collection of Taxes Law 1978 introduces penalties for non-compliance with the new local file, master file and SIT requirements in the event of failure to:
- provide transfer pricing documentation upon request – where a taxpayer has received a notice from the Department of Taxation to provide transfer pricing documentation (ie, the local or master file where applicable) and fails to do so within the required timeframe of 60 days, penalties between €5,000 and €20,000 will apply depending on the length of the delay; or
- submit a SIT – a penalty of €500 will be imposed.
The updates to the transfer pricing rules and documentation requirements are long-awaited developments. By incorporating the OECD guidelines into national law, Cyprus has demonstrated its commitment to align itself with international tax standards.
For further information on this topic please contact Alexis Christodoulou or Anna Cheimonidou at Elias Neocleous & Co LLC by telephone (+357 25 110 110) or email ([email protected] or [email protected]). The Elias Neocleous & Co LLC website can be accessed at www.neo.law.