Group relief provisions allow, subject to certain conditions, companies of the same group to transfer tax losses from loss-making group companies to profitable group companies. A group includes a Cyprus company directly or indirectly holding at least 75% of the voting shares of another Cyprus tax resident company or two or more Cyprus tax resident companies are at least 75% (voting shares) held, directly or indirectly, by a third company.
The interposition of a non-Cyprus tax resident company(ies) will not affect the eligibility for group relief as long as such company(ies) is tax resident in either another EU member state or a country with which Cyprus has in place a DTT or an exchange of information agreement (which may be bilateral or multilateral).
Further, a Cyprus tax resident company may also claim the tax losses of a group company that is tax resident in another EU member state, provided such EU company firstly exhausts all possibilities available to utilise its losses in its EU member state of residence or in the EU member state of any intermediary EU holding company.
As per the general provisions of the Cyprus tax legislation, transactions between related parties should be carried out on an arm's-length basis; otherwise, the Cyprus tax authorities have the power to adjust the taxable profits and deem additional income to reflect arm's-length prices. Compensating deductions may apply in certain cases.
The Cyprus tax authorities have communicated that the transfer of shares of companies within a group at a value different than the market value should not have any adverse Cyprus tax implications in certain circumstances.
On 30 June 2017, the Cyprus tax authorities issued a Circular providing guidance for the tax treatment of intra-group financing transactions (IGFTs). The Circular, effective as of 1 July 2017, closely follows the application of the arm’s-length principle of the OECD Transfer Pricing Guidelines. It applies for all relevant existing and future IGFTs. No grandfathering provisions have been provided for existing IGFTs, and any rulings previously issued on transactions within the scope of the Circular are no longer valid as of 1 July 2017.
The Circular requires the carrying out of a comparability analysis for the purpose of describing (delineating) the IGFT and determining the applicable arm’s-length remuneration. Of particular note in the comparability analysis are the requirements for (i) sufficient equity level for assumption of risks and (ii) adequate substance in Cyprus, relating to the IGFTs. Under certain conditions, taxpayers carrying out a purely intermediary intra-group financing activity may opt for a Simplification Measure (resulting in a minimum 2% after-tax return on assets).
Up to 31 December 2019, the Cyprus tax legislation did not include any explicit transfer pricing documentation requirements (e.g. mandatory preparation of transfer pricing studies, local file, master file), other than for certain financing transactions (as mentioned above). However, the Cyprus tax authorities had an expectation that taxpayers should be in a position to provide adequate supporting documentation (e.g. transfer pricing studies prepared in line with the OECD Transfer Pricing Guidelines) evidencing the arm's-length pricing of related party transactions.
As of tax year 2022 transfer pricing documentation requirements are expected to be introduced in the Cyprus tax legislation for all types of related party transactions.
The transfer pricing documentation compliance obligations include the preparation of Master File, Cyprus Local File and Summary Table for Cyprus tax resident persons and permanent establishments of non Cyprus tax resident persons situated in Cyprus that engage in transactions with related parties. A formal Advance Pricing Agreement (“APA”) procedure has also been introduced. Specific penalties for non compliance with the new obligations are now in place by an amendment to the Assessment and Collection of Taxes Law. The law amendments and Regulations are expected to be effective from the tax year 2022 onwards.
Transfer pricing documentation
As from the tax year 2022 onwards, Cyprus tax resident persons and permanent establishments of non Cyprus tax resident persons situated in Cyprus that engage in domestic and/or cross-border Controlled Transactions, subject to exemptions mentioned below, are required to prepare on an annual basis a TP Documentation File, which consists of the “Master File” and the “Cyprus Local File”.
The Cyprus Tax Department (“CTD”) is expected to issue a relevant Notification to announce (amongst others) the required detailed contents of the Master File and Cyprus Local File.
Contents: The required contents of the Master File and Cyprus Local File closely follow the definition and suggested contents of Master File and Local File as per the OECD TP Guidelines (and BEPS Action 13 Report).
Exemptions: The following exemptions apply:
- Master File: Only Cyprus tax resident entities that are the ultimate parent or surrogate parent entity of an MNE group falling under the scope of Country by Country reporting have an obligation to prepare and maintain a Master File. All other persons are exempt from this obligation.
- Local FIle: Persons that engage in Controlled Transactions with arm’s length value less than EUR750,000 p.a. per transaction category in aggregate (e.g. sale/purchase of goods, provision/receipt of services, financing transactions, receipt/payment of IP licensing/royalties, others) are exempt from the obligation to prepare a Cyprus Local File.
Quality review: A person who holds a Practicing Certificate from the Institute of Certified Public Accountants of Cyprus (ICPAC) or another approved by the Council of Ministers body of certified auditors in Cyprus is expected to perform a Quality Review of the Cyprus Local File.
Format and Language: The TP Documentation File should be maintained by the taxpayer in electronic or paper format and may be prepared in a generally acceptable language, preferably in English, however, the Cyprus Tax Department may request its translation in Greek if necessary.
Relevant Deadlines: The TP Documentation File (consisting of the Master File and Local File as applicable) must be prepared and be subject to Quality Review (if necessary) on an annual basis, by the deadline of filing the Income Tax Return for the relevant tax year.
The TP Documentation File needs to be retained in compliance with the general document retention obligations for tax purposes, however it should be submitted to the Cyprus Tax Department upon request by the Cyprus Tax Department (e.g. for the purpose of tax audit) and specifically within 60 days from the date of such request. Penalties shall be imposed for late or non filing (as described below).
TP Documentation File updates: The TP Documentation File must be updated on an annual basis and include details regarding the impact of market fluctuations or other events on the information and analyses included therein.
A Summary Table must be prepared by all taxpayers that engage in Controlled Transactions on an annual basis, disclosing details regarding such transactions, including the names and tax identification codes of the related counterparties, and the respective values per transaction category (sale/purchase of goods, provision/receipt of services, financing transactions, receipt/payment of IP licences/royalties, others). The Summary Table must be submitted electronically together with the Income Tax return for the relevant tax year.
The new Regulations introduce a formal APA procedure. Specifically, Cyprus tax resident persons and non Cyprus tax resident persons that have a permanent establishment situated in Cyprus may submit to the Cyprus Tax Department an APA request with respect to current or future domestic or cross border Controlled Transactions.
The APA may cover the various conditions and assumptions relevant for determining the arm’s length pricing of the Controlled Transactions for a specified period, including:
- the critical assumptions on the functional and risk profile of the parties involved,
- the relevant market conditions,
- the applicable TP method to be followed,
- the identified uncontrolled comparable transactions and any necessary adjustments made to determine the arm’s length price range,
- any other specialised matter relating to the pricing of the Controlled Transactions.
The Cyprus Tax Department examines the APA request and approves or rejects it.
Relevant timelines: The Cyprus Tax Department should issue the APA within 10 months (this may be extended up to 24 months) from the date of submission of the APA request by the taxpayer.
The APA may be applicable for a maximum term of four years, however, it can not apply for any tax year prior to the tax year in which the request is submitted.
Bilateral and Multilateral APAs: The APA request for cross border Controlled Transactions may be bilateral or multilateral, involving the tax authorities in other jurisdiction(s) with which Cyprus has concluded a Double Tax Treaty. In such cases, a corresponding request needs to be filed by the taxpayer with the authorities in the other jurisdiction(s) and the Cyprus Tax Department may consult in writing with such authorities under the Mutual Agreement Procedure, for the purpose of issuing the APA.
Validity of APAs: The prices of the Controlled Transactions covered by an approved APA will be considered as arm’s length, provided that any conditions included in the APA are met, and that the critical assumptions on which the APA was based continue to be valid and applicable.
An approved APA is considered binding, however, it can be revised, revoked or canceled under certain conditions.
Country-by-country (CbC) reporting
On 26 May 2017, the Cyprus Minister of Finance issued a Decree (replacing a Decree issued on 30 December 2016) introducing mandatory CbC reporting in line with the relevant amendment to the EU Directive on Administrative Cooperation (DAC) in the Field of Taxation, known as DAC4, and the G20/Organisation for Economic Co-operation and Development BEPS Action 13 CbC reporting requirements for multinational enterprise groups generating consolidated annual turnover exceeding EUR 750 million (MNE groups).
MNE groups with an ultimate Cyprus tax resident parent are required to file with the Cyprus tax authorities, a CbC report in cases where the consolidated turnover exceeds the threshold of EUR 750 million in the preceding fiscal year. The CbC report includes specific financial data covering income, taxes, and other key measures of economic activity by territory. Under certain conditions, a CbC reporting requirement may also apply for Cyprus tax resident entities belonging to an MNE group. Deadline for the submission of the CbC report is one year after the end of the relevant fiscal year.
Per the Decree, Cyprus tax resident constituent entities of an MNE group should notify the Cypress tax authorities as to whether they are the reporting entity and, if they are not, the details of the MNE group’s reporting entity. Deadline for the submission of the CbC notification to the Cyprus tax authorities by the Cyprus constituent entities of the group is the last day of the fiscal year. For example, in the case where the group has a fiscal year end of 31 December 2020, the deadline for filing the Cyprus CbC notifications will be 31 December 2020.
In line with the relevant EU Directive and the OECD’s Multilateral Competent Authority Agreement on the Exchange of CbC reports (MCAA), the Cyprus tax authorities will apply the automatic exchange of information mechanisms to exchange CbC reports filed by MNE groups in Cyprus with the tax authorities in other jurisdictions in which the MNE group operates. Specifically, the reports will be exchanged with the tax authorities of the other EU member states in which the MNE group operates and all other jurisdictions that have signed the MCAA and have an activated exchange relationship with Cyprus or have concluded a bilateral agreement for the exchange of CbC reports with Cyprus.
Interest limitation rule
As of 1 January 2019, an interest limitation rule applies in accordance with the ATAD.
Cyprus, consistent with the options foreseen by the ATAD, excluded from the scope of application of this rule:
- standalone companies (i.e. companies that on a worldwide basis are not members of a group/have no associates/no PEs), and
- financial undertakings that broadly correspond to regulated financial undertakings, such as banks, insurance entities, investment funds, pension funds, and securitisation vehicles.
Where a Cyprus CIT payer is a member of a Cyprus group, the interest limitation rule applies at the level of the Cyprus group; otherwise, it applies per company or per Cyprus PE. The Cyprus group for this rule has a 75% relationship condition and is referred to below as ‘the Cyprus group’.
How the rule works
The interest limitation rule limits the otherwise deductible exceeding borrowing costs (EBCs) of the Cyprus CIT payer/Cyprus group to 30% of adjusted taxable profit (taxable EBITDA).
The interest limitation rule contains an annual EUR 3 million safe-harbour threshold. This means that EBCs up to and including EUR 3 million is in any case not restricted by this rule (the EUR 3 million threshold would apply in cases where ‘30% of taxable EBIDTA’ results to an amount below EUR 3 million). In the case of a Cyprus group, the EUR 3 million applies for the aggregate EBCs of the Cyprus group and not per taxpayer.
The taxable EBITDA is computed by adding back to the taxable profit of the year the EBCs, depreciation, amortisation, and deductions in relation to tangible/intangible fixed assets. The 80% Cyprus ‘IP box’ deduction on qualifying IP profits is added back to the taxable profit for the purposes of determining the taxable EBITDA.
EBCs are defined as the amount of tax deductible borrowing costs in excess of the amount of taxable interest income/other taxable income economically equivalent to interest.
The term ‘borrowing costs’ is broadly defined and covers interest expenses on all forms of debt, other costs economically equivalent to interest expenses, as well as expenses incurred in connection with the raising of finance including, for example, payments under profit participating loans, financing related hedging costs, and guarantee fees. Consistent with the OECD BEPS Action 4, from which the interest limitation rule derives, the annual Cyprus notional interest deduction (NID), which is calculated on new equity (introduced in Cyprus with effect from 1 January 2015), is not considered as ‘borrowing costs’ for the purposes of this rule.
The interest limitation rule applies to EBCs irrespective of whether the financing is with related parties or third parties.
Grandfathering of loans concluded before 17 June 2016
When determining the amount of deductible EBCs that may be limited under this rule, the EBCs of loans concluded before 17 June 2016 are excluded and remain deductible. This exclusion shall not extend to any subsequent modification of such loans.
Long-term infrastructure projects
When determining the amount of deductible EBCs that may be limited under this rule, the EBCs arising from loans used to finance long-term infrastructure projects in those cases where the project operator, borrowing costs, assets, and income are all in the European Union are excluded and remain deductible.
The corresponding taxable profit from such long-term infrastructure projects is excluded from the taxable EBITDA.
Group equity escape
There is an annual election for a group equity escape, which is based on the level of equity of the Cyprus CIT payer/Cyprus group as compared to the level of equity within the Cyprus CIT payer’s/Cyprus group’s consolidated group for financial reporting purposes (on a worldwide basis). In cases where the ratio of ‘equity/total assets’ is higher at the level of the Cyprus CIT payer/Cyprus group (or even up to 2% lower) as compared to its consolidated group for financial reporting purposes (on a worldwide basis), the interest limitation rule, in effect, does not apply for that tax year.
The interest limitation rule also contains carry forward provisions. EBCs not deductible in a tax year due to the application of this rule may be carried forward to future tax years for up to five years. This five-year carry forward is in line with Cyprus’ five-year income tax loss carry forward rule.
Additionally unused interest capacity (i.e. where the amount of 30% of taxable EBITDA is in excess of the EBCs for a tax year) that has not been utilised within a tax year may be carried forward for use for the next five tax years.
The above carry forward provisions are subject to an anti-abuse rule in certain cases of change in ownership of the company.
Controlled foreign companies (CFCs)
A CFC is a low-taxed non-Cyprus tax resident company in which the Cyprus CIT payer, alone or together with its associated enterprises, holds a direct or indirect interest of more than 50%.
A CFC is also a low-taxed foreign PE of a Cyprus tax resident company that is exempt from tax in Cyprus (exempt foreign PE).
A non-Cyprus tax resident company (or an exempt foreign PE) is considered as low-taxed if the actual foreign corporate tax paid by it on its profits is lower than 50% of the corporate income tax charge that would have been payable in Cyprus under the Cyprus CIT rules had it been a Cyprus tax resident company.
The CFC rule does not apply to non-Cyprus tax resident companies (or exempt foreign PEs):
- with accounting profits of no more than EUR 750,000 and non-trading income of no more than EUR 75,000, or
- of which the accounting profits amount to no more than 10% of their operating costs for the tax period. For the purposes of this exception, operating costs do not include the cost of goods sold outside the country where the non-Cyprus tax resident company (or the exempt foreign PE) is tax resident and payments to associated enterprises.
Cyprus has opted for the Model B approach as foreseen in the ATAD.
When a non-Cyprus tax resident company (or an exempt foreign PE) meets the definition criteria of CFC (refer to Scope above), the Cyprus CIT payer must include in its taxable profit the non-distributed income of the CFC to the extent such income arises from non-genuine arrangements that have been put in place for the essential purpose of obtaining a tax advantage (refer to Non-genuine arrangement test below).
Non-distributed income of the CFC is defined as the after tax accounting profit of the CFC, which has not been distributed to the Cyprus CIT payer during the Cyprus tax year in which the CFC profits are included (refer to Inclusion rules below) or within the next seven months.
Non-genuine arrangement test
An arrangement or series thereof shall be regarded as non-genuine to the extent that the CFC would not own the assets or would not have undertaken the risks that generate all, or part of, its income if it were not controlled by the Cyprus CIT payer where the significant people functions (SPFs) that are relevant to those assets and risks are carried out and are instrumental in generating the CFC’s income.
The non-distributed income of the CFC included in the taxable profit of the Cyprus CIT payer shall be limited to amounts generated through assets and risks that are linked to the SPFs in the Cyprus CIT payer and is calculated based on arm’s-length principles. Further, this amount shall not exceed the amount of the non-distributed income of the CFC (grossed-up for the CFC’s foreign corporate tax paid) that resulted from assets and risks associated with the SPFs carried out by the Cyprus CIT payer.
The same provisions apply in those cases where the CFC generates losses instead of profits.
The CFC income or loss, depending on the case, to be included in the taxable profit of the Cyprus CIT payer is calculated based on the Cyprus CIT payers’ percentage of entitlement of the CFC’s profits. The CFC income or loss must be included in the Cyprus tax period in which the tax year of the CFC ends. Upon inclusion, such income or loss shall be subject to the normal Cyprus CIT rules.
Avoidance of double taxation on CFC income
Cyprus shall grant a tax credit against the Cyprus CIT payable for certain taxes paid abroad on the CFC income.
Additionally, rules have been put in place to prevent double taxation in Cyprus in cases where income that has previously been included in Cyprus under the CFC rule is subsequently actually distributed or realised through a disposal of investment.
General Anti-Abuse Rule (GAAR)
The Cyprus ATAD first implementation law includes the ATAD GAAR. This requires (for the purposes of calculating the Cyprus CIT liability of the Cyprus CIT payer) an arrangement or a series of arrangements to be ignored where these, having been put into place for the main purpose or one of the main purposes of obtaining a tax advantage that defeats the object or purpose of the applicable tax law, are not genuine, having regard to all relevant facts and circumstances.
An arrangement or a series thereof shall be regarded as non-genuine to the extent that they are not put into place for valid commercial reasons that reflect economic reality.