The New Switch Pricing (TP) Laws In Cyprus & Its Anticipated Impression – Tax Authorities

Change

Expected impact

1.

Change of Related parties’ definition

As per the proposed legislation “related parties” will

be considered companies with a 25% direct or

indirect relationship. Relationship is assessed based on share

ownership, voting rights, or profit participation. Previously

related parties’ relationship was assessed based on share

ownership (>50%) or through voting rights, only.

Expected impact: High

The scope of related party transactions broadens since the % for

share ownership, voting rights is reduced (from 50% to 25%) and

profit participation is introduced.

2.

Assessment of pricing based on OECD Transfer Pricing

guidelines

Introduction of a new paragraph (par.6), that states that

pricing between related parties might be assessed

(and hence adjustments to apply), based on the OECD Transfer

Pricing guidelines (as issued and amended from time to time).

Expected impact: High

The proposed amendment introduces the OECD TP guidelines as a

tool for assessing pricing for related parties’ transactions.

Previously there was not any provision other than the general

“arm’s length” principle. The use of the word

might instead of should or must, indicates that

there would be cases where the OECD TP Guidelines might not be

necessarily applied. (i.e., based on the value of the transactions

– see below).

3.

3. Introduction of Filing requirements

1. Related parties need to prepare and submit an informative table
   
   with their related party transactions, prepare, and keep in their
   
   records a Master File, and a Local File, subject to the exemptions
   
   below:

Exemptions

1. Related parties are not subject to Local file documentation
   
   requirements if their transactions in aggregate, per category, are
   
   (or should be, based on OECD TP Guidelines) less than
   
   €750.000.
2. Related parties are not subject to Master File requirements if
   
   they are not the Ultimate Parent Entity or the Surrogate Parent
   
   Entity of a Multinational Enterprise Group (MNE) as per the
   
   definitions of the law for the Automatic Exchange of Information in
   
   the field of taxation.

3. Filing

   The informative table needs to be submitted with the
   
   company’s tax form for the year.

   Update of documentation:

   Local files/Master files need to be updated on a yearly
   
   basis.

   Transfer Pricing Audits:

   In case of a transfer pricing audit request the relevant
   
   documentation should be submitted to the tax authorities within 60
   
   days.

Expected impact High – Local Files.

Low – Master Files

It is expected that for most of the cases Local files will be

needed to be prepared for Cypriot taxpayers. Note that,

transactions between Cypriot entities only, are not excluded from

the filing/reporting requirements.

The impact for Master files is expected to be low given the fact

that Ultimate or Surrogate parent entities of MNEs covered by the

Automatic Exchange of Information directive should probably have

such documentation already in place in case of request from other

jurisdictions that have operations.

The informative table needs to be submitted in case that there

are transactions with related parties, irrespective of their value

(the €750.000 cap does not> apply for the

informative table).

4.

Regulations

Introduction of Regulations for the

implementation of the OECD TP Guidelines and the related filing

requirements.

The main provisions as per the Regulations are presented

below:

3. The filing requirements (informative table, Master File, Local
   
   file) need to be ready by the date of submission of the tax form
   
   (currently 15 months from the yearend).
4. The Local File needs to be quality reviewed by a Cypriot
   
   Registered Audit Firm/Person.

Expected impact High – Local Files.

Low – Master Files

5.

APAs

Introduction of article 33Γ, which gives the possibility

to taxpayers to apply for pre-approval to the Tax Department of the

methodology for the pricing of cross border transactions with

related parties. This is what is known as Advance Pricing

Arrangements (APAs)

The procedure for application for an APA is based on the

Regulations.

As per the Regulations:

1. The Tax commissioner issues a decision within 10 months from
   
   the application. In certain cases, the timing for the issue of a
   
   decision can be extended to 24 months. The APA can be valid for a
   
   period of 4 years maximum from the date of application.
2. In case that the application involves parties that are tax
   
   residents in countries where a double tax treaty with Cyprus exists
   
   then a similar application needs to be made to the other countries
   
   as well. In case that the application in CY includes a request to
   
   deal with the foreign tax authorities the Commissioner may conduct
   
   the competent authorities of the other countries based on the
   
   Mutual Agreement Procedure of the respective double tax
   
   treaty.

The APA may be revoked by the Commissioner in certain cases such

us when there is a material breach of one or more of the critical

assumptions; or when there was a change in tax law, including a

treaty provision materially relevant to the APA or due to provision

of wrong information, data etc.

Expected impact: Low

Advance Pricing Arrangements are introduced for cross border

transactions. The APAs are giving certainty to taxpayers for the

pricing of the transactions. However, given the timing requirements

for the application’s examination and the requirement for

communication and agreement with the competent authorities of the

other countries involved, will keep the number of applications at

low levels. This is also observed internationally. As per EU

statistics for 2020 (

Statistics on APAs and MAPs in the EU (europa.eu)) there have

been a total of 1.753 new APAs requests within EU for 2020, 1125

involving only EU members and 628 involving third countries as

well. The 60% of these applications relate to requests to Belgian

Tax authorities.