In the new circular issued on 24 November 2016, Cyprus’ Tax Authorities clarify that they will also allow downwards or compensating Transfer Pricing (TP) adjustments.

Circular 2016/15 issued by the Ministry of Finance clarifies the application of article 33 of the Income Tax Law. Article 33 - as amended in 2015 (L.187(I)/2015) - provides the definition of the arm’s length principle for controlled transactions between associated enterprises. In particular, according to the above-mentioned article, if a taxpayer is resident in Cyprus or if there is a permanent establishment of a non-resident in the Republic then for any deviation from the arm’s length price, downward adjustments are also possible. In other words, for intra-group transactions on terms that deviate from similar transactions between independent parties, the tax base may be adjusted in order to reflect an arm’s length price.

According to paragraph 5 of the article 33, in case that a taxpayer’s tax base is increased because of TP adjustments a notional expense for the other party in the transaction would be acceptable.

The circular clarifies that the implementation of the article 33 (5) may be initiated by the taxpayer. In such a case of a documented TP adjustment, the tax authorities may accept the relevant adjustment and include not only notional revenue but also the corresponding notional expense for enterprises resident in Cyprus or for PEs of non-residents in Cyprus.

On the basis of TP documentation, taxpayers may request or propose relevant adjustment which will better reflect the arms’ length principle. As a result, in the event of underestimating of the tax base cause by intra-group transactions, Cypriot enterprises may receive a compensating adjustment for the other party engaged in the said transaction.