Changes on the tax treatment of intra-group financing arrangements – Cyprus

The Cyprus Ministry of Finance would like to inform the public that the Commissioner of Taxation has issued on July 1st, 2017 a Circular for the tax treatment of intra-group financing arrangements. This follows constructive contact with the Directorate General for Competition of the European Commission on the matter.

The Circular has been drafted having regard to the provisions of the OECD transfer pricing guidelines. The said Circular applies to any company carrying out group financing transactions that is a Cyprus tax resident, as well as to any company that is not a Cyprus tax resident and has a permanent establishment in Cyprus, as per Section 2 of the Income Tax Law 118(I)/2002.

Intra-group financing transaction is defined as any activity consisting of financing through loans or cash advances remunerated by interest (or should be remunerated by interest) to related companies, or other financial means and instruments, such as debentures, private loans, cash advances and bank loans.

The Circular provides for the application of the arm’s length principle to intra-group financing transactions, and clarifies the conditions under which the agreed remuneration complies with the arm’s length principle, which is the remuneration that would have been agreed under comparable conditions in the open market.

In the case of companies performing functions similar to those performed by regulated financing and treasury companies, a return on equity of 10% after-tax can be currently observed in the market and can be taken as reference in calculating the arm’s length remuneration for the financing and treasury functions in question.

This percentage will be regularly reviewed by the Tax Department based on relevant market analysis. The minimum equity level of these companies shall be in line with the equity requirements set for credit institutions by the relevant EU regulations.

The Circular also entails simplification measures notably where a group financing company pursues a purely intermediary function. In these cases, the transactions are deemed to comply with the arm’s length principle if the analyzed entity receives in relation to its controlled transactions under analysis, a minimum return of 2% after-tax on assets.

A deviation from the minimum return is not allowed unless it is duly justified by an appropriate transfer pricing analysis. The Circular also sets the minimum requirements for a transfer pricing analysis.

These guidelines on intragroup financing arrangements come into effect as from July 1st 2017, for all existing and future transactions, irrespective of the date of entering into the relevant transactions and irrespective of any tax rulings issued prior to the said date.

It is further noted that any tax rulings issued prior to July 1st, 2017 on transactions within the scope of this circular will no longer be valid for tax periods as from 1st July 2017. If the intra group financing transactions effected prior to the 1st of July 2017, are still ongoing post the reference date and they were supported by Transfer Pricing study, the said Transfer Pricing study will need to comply with the minimum provisions of this circular which will be verified by the Commissioner of Taxation.

Source: Cyprus Ministry of Finance – July 21^st, 2017