Cyprus: Abolition Of Profit Margins On Intra Group Loans - Upcoming Transfer Pricing Legislation - Transfer Pricing Studies Requirement

As a rule and according to Article 33 of the Cyprus Income Tax Law, which introduces the arm's length principle (using wording similar to that of article 9 of the OECD Model Tax Convention), all transactions between companies, including loan agreements/transactions by Cyprus companies, must be undertaken at arm's length terms.

The arm's length principle (ALP) is the international consensus on transfer pricing and it is a term used to describe a range of values that can be defined for purpose of selecting an appropriate arm's length price from comparable transactions. (OECD Glossary)

An arm's length transaction could be described as the condition or the fact that the parties to a transaction/agreement are independent and on an equal footing (wikipedia) and have concluded the transaction/agreement freely and independently of each other, i.e. without any of the parties being able to control the other. Such a transaction, therefore, is an "arm's-length transaction".

The Cyprus Tax Authority has the right to impose tax adjustments to make up for any deviation from the arm's length principle. Such adjustment is usually made in the form of a notional interest income.

As a long practice, the Cyprus Tax Authority treated back-to-back loans differently. It accepted such thin spreads/minimum profit margins without challenging the arm's length applicability. Due to this practice, Cyprus companies benefitted considerably from the use of back-to-back loans. Back-to-back loans are considered to be those which the Cyprus tax resident company borrows and in return lends to related and/or connected and/or associated parties leaving a small profit margin in Cyprus.

In the glossary of the OECD, a back to back loan is a method of borrowing between related and/or connected and/or associated parties where a loan is channeled through an independent third-party intermediary and arm's length principle is the standard adopted by the OECD and in many jurisdictions, which mandates that the result related parties obtain from an intercompany transaction approximates the result that uncontrolled parties would have obtained had they undertaken the same transaction under the same circumstances.

In this case, the Cyprus tax resident company, usually set up as an international financing company, is used as an intermediate company to borrow and in return lend what borrowed to a related (related to the Cyprus company) non tax resident company.

Following recent international developments and in particular the OECD/G20 BEPS Project, (which is said to equip governments with domestic and international instruments to address tax avoidance and ensure that profits are taxed where economic activities generating the profits are performed and where value is created), the Action Plan on Base Erosion and Profit Shifting ("BEPS Action Plan") identified 15 actions to address BEPS in a comprehensive manner. In October 2015, the G20 Finance Ministers endorsed the BEPS package which includes the report on Action 13: Transfer Pricing Documentation and Country-by-Country Reporting ("the 2015 Action 13 Report", OECD (2015)). Following that, the countries participating in the Project agreed to a new framework that will allow all interested countries and jurisdictions to work jointly for the implementation of the package of measures against BEPS. ( )

The Cyprus Tax Authorities, have recognized the potential for cross-border controlled transactions such as the abovementioned Cyprus back-to-back loan transactions to distort taxable income.

Following detailed studies of the existing tax regime and having reviewed and examined the existing code of conduct for the taxation of business as well as the state aid rules applicable within the EU, with the wish to become fully complied with the OECD BEPS framework and the international standards as they have developed, the Cyprus Tax Authorities have decided to proceed with the alteration of the current tax regime in relation to profit margins on loans between related and/or connected parties.

The Tax Department has already announced in February 2017 its decision to abolish the current tax practice in relation to the minimum acceptable margins on loans granted to related parties by the 30th June 2017 (inclusive).

Based on the announcement, the existing practice with the minimum acceptable margins will apply up to 30th June 2017, and from 1st July 2017 all loan transactions (and/or other financing arrangements and similar instruments) between Cyprus Tax Resident Companies and their related companies should satisfy the arm's length principle and the interest rate used should be based on current market conditions. The announcement further adds that, this will have to be supported by relevant transfer pricing studies (TPS). In other words, whether the arm's length principle will, in each time/case, be considered as satisfied and whether the interest rate used in the particular transaction under assessment will be considered as rightly having based on the market's conditions as existed at the time of the determination, will largely be based on and formed by supporting documentation, i.e. transfer pricing documentation that will need to be submitted and which, as per the announcement of the Tax Department, this is the TPS.

In fact, the current legal framework in Cyprus does not include any detailed transfer pricing rules and regulations, nor does provide for any transfer pricing studies to be submitted. For these reasons the Tax Authorities also indicated that detailed transfer pricing rules for intra-group financing transactions, based on the OECD transfer pricing guidelines, will be announced in the near future. The new rules will not only apply for the purposes of tax assessment but also for the purposes of issuing tax rulings.

These same rules will also provide for the transfer pricing studies requirement (TPS), as abovementioned, which, as the announcement indicates, will have to be prepared by independent experts and be based on the OECD principles, procedures and standards. The announcement does not give any further details nor it provides information on the specific transfer pricing rules to be enacted. It does not mention anything about the content and timing of the required TPS either.

In fact, the TPS forms part of the first attempt by Cyprus to enact a national transfer pricing framework and the use of transfer pricing documentation. Based on the latest OCED transfer pricing guidelines an important consideration in developing such rules is to balance the usefulness of the data to tax administrations for transfer pricing risk assessment and other purposes with any increased compliance burdens placed on the taxpayers. ( )

According to the 2014 OECD guidance on Transfer Pricing Documentation and Country by Country (CbC) Reporting, the following objectives should be considered in designing appropriate domestic transfer pricing documentation requirements:

  1. to ensure that tax payers give appropriate consideration to transfer pricing requirements in establishing prices and other conditions for transactions between associated enterprises and in reporting the income derived from such transactions in their tax returns;
  2. to provide tax administrations with the information necessary to conduct an informed transfer pricing risk assessment; and
  3. to provide tax administrations with useful information to employ in conducting an appropriately thorough audit of the transfer pricing practices of entities subject to tax in their jurisdiction, although it may be necessary to supplement the documentation with additional information as the audit progresses. ( )

Taxpayers themselves, therefore, first would need to evaluate their own compliance with the newly applicable transfer pricing rules. And in fact a well-prepared transfer pricing study will provide tax administrations with a solid indication that the particular taxpayer has indeed analysed the positions it reports on tax return, has considered the available comparable data and has reached consistent transfer pricing positions. On the other hand, tax administrations would need to be able to access sufficient, relevant and reliable information when conducting a transfer pricing risk assessment to decide whether to perform an audit or when assessing an enquiry for a ruling and obviously the TPS may be considered a critical source of information for such risk assessment.

The TPS, therefore, should be able of consistently demonstrating that the results of transactions with related and/or connected and/or associated parties are determined for tax purposes according to arm's length principle. For this purpose the TPS should provide adequate accounting records and adjustment records (i.e. records identifying adjustments made on account of tax rules to move from profits in account to taxable profits). It should, further, identify specific transactions to which the transfer pricing rules apply and provide relevant evidence capable of proving that the result of these transactions is indeed arm's length for purposes of the transfer pricing rules.

The TPS, in this way, actually forms an inherent part of the taxpayer strategic tax risk management.

It is expected that the Cyprus Tax Authorities might not require independent Transfer Pricing studies if the interest on loans between related parties is not below certain market averages.

Furthermore, the Tax Authority announced that, any tax rulings relevant to the minimum acceptable profit margins which have been already issued (up to 30th June 2017) are rendered void and will be treated as inapplicable.

Any relevant transactions still in place after 30 June 2017 will have to be supported by the said Transfer Pricing Studies after that date.

This new rule will affect all the financial transactions between related companies for both tax assessment purposes and for the issuance of tax rulings.

In addition, all tax rulings which have been issued up to 30th June 2017 in relation to this subject will become void.

A large number of taxpayers will most probably be affected by the abovementioned changes. We, therefore, strongly recommended that taxpayers and other interested parties undertake a review of their current group structures and existing financing arrangements, monitor the developments around the implementation of the new transfer pricing regime, identify and assess possible and sensitive gaps in order to assess the potential impact of the upcoming changes and re-evaluate their strategies timely take corrective actions (possibly including the restructuring of their loans by taking advantage of the Notional Interest Deduction (NID) provisions giving out a loan through own funds that were introduced in the share capital of the company) in an attempt to ensure their conformity with the new tax pricing framework.


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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions