Intra – group financing transactions
Intra – group financing transactions. Circular issued from Cyprus Tax authorities
On 30 June 2017 the Cyprus Tax Authorities issued a circular providing guidance regarding the tax treatment of the intra – group financing transactions following the abolishment of the minimum margin scheme from 01/07/2017.
The circular applies for existing and future financing transactions, therefore existing arrangements need to be revised in terms to comply with the circular.
The Circular follows the guidelines of OECD regarding Transfer Pricing (TP) and requires that these transactions follow the arm’s length principle.
The main terms of the Circular are described as below.
1. Type of companies affected by the Circular
The Circular applies for the Cyprus Tax resident companies and permanent establishments situated in Cyprus that are granting loans/cash/advances to related parties that carry (or should carry) interest and these are financed by loans/advances/bank borrowings. Investment holding activities are not taken into consideration. Related parties as defined in section 33 of the Income tax law N118 (I)/2002 (as amended)
2. How the intra group financing transactions will be taxed
The tax authorities require that these transactions should comply, for tax purposes, with the arm’s length principle (i.e the price that would be accepted by independent parties in comparable transactions carried out in comparable circumstances).
In order to substantiate the arm’s length principle, the affected companies need to carry out a transfer pricing study for each financial transaction that will contain a comparability analysis with similar transactions in the open market. The circular describes the elements and characteristics of the comparability analysis and the minimum contents/requirements of a transfer pricing study.
In case that a company has similar characteristics with regulated financing institutions an after tax return on equity of 10% is considered as an arm’s length remuneration (return) for the purposes of the comparability analysis.
3. Simplification measures
The pure financing companies have option to opt for simplification measures where under these measures the transactions are deemed to comply with the arm’s length principle if at least 2% after tax return is received on the total assets of the Company. Grossing up this figure it means that the effective tax of the Company will be 0,286% on total assets (2%/ (1-12,5%). This percentage will be regularly reviewed by the Cyprus Tax Authorities. If opt for the simplification measure no Transfer Pricing Study needs to be prepared. The mechanism for the simplification measure is that it will be declared through annual tax form (expecting 2017 tax form).
Deviation from the minimum margin is allowed only in exceptional cases and only if supported by an appropriate Transfer Pricing Study.
a) The use of the simplification measures, tax rulings and advance pricing arrangements will be subject to exchange of information rules. Advance pricing arrangements are binding advance agreements between the tax authorities and the taxpayer for setting the method for determining the prices for intercompany transactions.
b) The Transfer Pricing Study need to be prepared by a TP expert. The TP study will be submitted to the Tax Authorities by a licensed company auditor who is required to perform an assurance engagement on the TP study.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Our tax specialists are at your disposal should you require any further information or clarifications.