New Transfer Pricing Documentation requirements
New amendments to the Income Tax Law Section 33 and the Assessment and Collection of taxes Law have been published in the Government Gazette on 08 July 2022 (relevant ITL publication can be found here and ACT publication here), which set out new Transfer Pricing (TP) requirements applicable from 1 January 2022, in line with recommendations of the OECD.
The new amendments which are accompanied by the relevant Regulation 273/2022 (can be found here) stipulate the following:
- Amendment to the definition of connected personsThe reference to “control” has been abolished. A threshold of 25% has been introduced to define transactions with a related (or connected) person. The 25% threshold applies as follows.A company is connected with another company where:
- The same person holds directly or indirectly at least 25% of the share capital of both companies, or has at least 25% of their voting rights or has a right to a share of at least 25% of the income of both companies;
- The same person and persons connected with that person hold directly or indirectly at least 25% of the share capital of both companies, or have at least 25% of their voting rights or have a right to a share of at least 25% of the income of both companies;
- A group of two or more persons holds directly or indirectly at least 25% of the share capital of each company, or have at least 25% of their voting rights or have a right to a share of at least 25% of the income of each company, and the groups either consist of the same persons or could be regarded as consisting of the same persons by treating (in one or more cases) a member of either group as replaced by a person with whom they are connected.
A company is connected with another person if that person holds directly or indirectly at least 25% of the share capital of that company, or has at least 25% of its voting rights or has a right to a share of at least 25% of the income of that company or that person and persons connected with them hold directly or indirectly at least 25% of the share capital of that company, or have at least 25% of its voting rights or have a right to a share of at least 25% of the income of that company.
Any two or more persons acting together to secure directly or indirectly at least 25% of the share capital of a company or at least 25% of its voting rights or a right to a share of at least 25% of the income a company are considered in relation to that company as connected between them and with any person acting on the directions of any of them to secure directly or indirectly at least 25% of the share capital of that company or at least 25% of its voting rights or a right to a share of at least 25% of the income that company.
- New TP documentation requirements
The new regulations capture Cyprus Tax resident companies and permanent establishments of non-resident companies, which have the obligation to maintain TP documentation in the form of a Local File and/or (in some cases) a Master File to support their controlled transactions, i.e. transactions with related (or connected) parties.Exemptions to the said obligation include the following:
- No obligation for the maintaining of a Local File in case the aggregated value of the controlled transactions per category does not exceed €750.000 per tax year;
- No obligation for the maintaining of a Master File in case a taxpayer is not part of an MNE Group subject to Country-by-Country Reporting, i.e. is not part of a Group with consolidated revenues in excess of €750m. In case a taxpayer is a member of such MNE Group subject to Country-by-Country Reporting, there is no obligation for the maintaining of a Master File if the said taxpayer is not the Ultimate Parent Entity or the Surrogate Parent Entity of the Group for Country-by-Country Reporting purposes.
Affected taxpayers should also submit a Summary Information Table (SIT) on an annual basis along with their Income Tax Return, setting out some summarised information about their related party transactions.
Concerning the Local and Master files, where a relevant obligation exists, the law and the relevant Regulation stipulate that these must be prepared until the submission deadline of the Income tax return of a particular tax year and must be updated annually. The current statutory deadline for Corporate tax returns is 15 months after the tax year-end.
The said files must be made available to the Tax Department upon their request within 60 days.
The penalties for non-compliance (i.e. late submission), are as follows:
– For failure to provide TP documentation upon request within 60 days is between €5,000 – €20,000 depending on the length of the delay.
– For non-submission of an SIT the penalty is €500.
The Regulation also stipulates that a person holding a professional practising certificate from ICPAC (or a similar body) should undertake an assurance quality review of the Local File, the latest until the submission deadline of the Income tax return of a particular tax year.
- Introduction of Advance Pricing Agreements (APAs):
An APA is a voluntary agreement between a taxpayer and the tax authorities for the appropriate/acceptable TP methodology for a related party transaction for a certain period of time.
The tax department will examine an application and reach a decision to be communicated to the taxpayer within 10 months from the date of the relevant application, with the possibility of a longer period of 24 months to be set by the Commissioner of Taxation.
In the case of bilateral or multilateral APA, a Taxpayer should also submit the application to the competent authorities of all relevant foreign tax authorities.
The validity of an APA should in principle last for a period not exceeding 4 years, if not revoked or cancelled by the Tax Department under certain circumstances.
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