The Cyprus tax authorities have issued a circular clarifying that income from embedded Intellectual Property for the application of old and new Cyprus IP boxes (See Sec 10.3) is required to be supported by transfer pricing study based on OECD guidelines.

Intra-group financing arrangements

The Cyprus Ministry of Finance has issued a circular providing guidance on the application of the arm's length principle to intra-group financing transactions and the minimum requirements for a transfer pricing analysis. The circular applies to any company carrying out group financing transactions that is a Cyprus tax resident, as well as non-residents with a permanent establishment in Cyprus. Intra-group financing transaction includes any activity consisting of financing through loans or cash advances remunerated by interest to related companies, or other financial means and instruments, such as debentures, private loans, cash advances and bank loans.

As per an instruction to the Institute of Certified Public Accountants of Cyprus (ICPAC) in March 2017, effective from 1 July 2017, minimum profit margins will no longer be accepted for back-to-back intragroup loans, and all related-party financing will require a transfer pricing study from that date based on OECD guidelines. For companies performing functions similar to those performed by regulated financing and treasury companies, reference may be made to the market return on equity of 10% after-tax for calculating the arm's length remuneration for the financing and treasury functions. Further, where a group financing company pursues a purely intermediary function, the transactions are deemed to comply with the arm's length principle if the entity receives in relation to its controlled transactions under analysis, a minimum return of 2% after-tax on assets. Any deviation from the minimum return must be justified by an appropriate transfer pricing analysis.

Any tax rulings or APAs issued by the Cyprus Tax Department concerning back-to-back loans prior to 1 July 2017 will cease to apply from that date. Transfer pricing studies for arrangements entered into prior to 1 July 2017 will need to comply with the new requirements and are subject to verification by the Commissioner of Taxation.

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