20/03/2024

What is ESG and why is it important for you? Yiallourides & Partners experts explain

in 2024, Tax

At Yiallourides & Partners, we recognise the significance of Environmental, Social, and Governance (ESG) principles in shaping the modern business landscape. ESG represents a comprehensive, industry-specific, framework utilised for evaluating a company’s performance across non-financial dimensions. Each of the three pillars encompasses various aspects of an organisation’s activities and is used to evaluate the company’s business model and commitment towards sustainable practices.

1.Environmental: Analysis of a company’s ecological footprint through consideration of factors such as carbon emissions, energy efficiency, waste management, and conservation of natural resources. Prioritisation of environmental considerations unlocks new opportunities for businesses to improve operations while positively contributing to global sustainability goals.

2.Social: Assessment of a company’s interaction with key stakeholders incorporating aspects such as respect for human rights, employee welfare, diversity and inclusion policies, and contributions to social welfare. Strengthening social practices fosters trust, enhances reputation, and strengthens relationships with stakeholders, thereby fostering long-term resilience and success.

3.Governance: Evaluation of structures, processes, and policies that guide a company’s decision-making and operations via elements such as board composition, transparency in financial and sustainability reporting, ethical standards, risk management practices, and compliance with laws and regulations. Robust governance practices ensure integrity and accountability and are critical in sustaining investor confidence and driving long-term value creation.

By embracing ESG principles, businesses can unlock numerous benefits, including enhanced risk management, improved financial performance, stronger stakeholder relationships, and positive societal impact. At Yiallourides & Partners, we specialise in helping organisations navigate the complexities of ESG and integrate sustainable practices into their core business strategies. Our tailored solutions empower businesses to embrace sustainability, drive innovation, and create value in an ever-changing world. Partner with us to embark on your journey towards a more sustainable and responsible future.

Why ESG

With COP28 (Conference of the Parties, as part of the United Nations’ Climate Change Conference) signalling a renewed commitment to climate action and sustainability on a global scale, businesses are facing unprecedented pressure to align their operations with ESG principles. Against the backdrop of a rapidly evolving regulatory landscape, it is pivotal for businesses to integrate ESG into their strategic planning. By acknowledging the transformative potential of ESG, our firm stands ready to guide companies in embracing ESG as a catalyst for sustainable growth and lasting impact.

  1. Risk Mitigation: Incorporating ESG principles into business strategies helps organisations identify, assess, and mitigate risks. Whether related to environmental regulations, social license to operate, or governance practices, proactive management of ESG risks enhances resilience and safeguards long-term value creation.

2. Stakeholder Expectations: Stakeholders, including investors, customers, employees, and communities, increasingly demand transparency, accountability, and ethical conduct from businesses. By aligning with ESG principles, organisations can meet these expectations and strengthen relationships with stakeholders, ultimately enhancing their reputation and competitiveness.

3. Long-Term Value Creation: ESG integration is not just about risk mitigation; it’s also about seizing opportunities for value creation. Companies that prioritise sustainability, diversity, ethical governance, and social responsibility often outperform their peers financially. By addressing ESG factors, organisations can drive innovation, enhance operational efficiency, and unlock new markets, thereby positioning themselves for long-term success.

4. Regulatory Compliance: Governments and regulatory bodies worldwide are increasingly mandating ESG disclosure and accountability. Compliance with ESG regulations not only reduces legal and reputational risks but also demonstrates a company’s commitment to responsible business practices.

5. Investor Preference: Investors are increasingly incorporating ESG considerations into decision-making processes. Companies with strong ESG performance are more attractive to investors seeking sustainable and ethical investment opportunities. Embracing ESG principles can improve access to capital, lower financing costs, and enhance shareholder value.

At Yiallourides & Partners, we recognise that ESG is not just a trend but a fundamental shift in how businesses operate.

For more details, please contact:

Managing Director

George Yiallourides

yiallourides@yiallouridesconsultants.com.cy

Tax Manager

Ioannis Charalampous

ioannis@yiallouridesconsultants.com.cy

19/03/2024

Transfer pricing – A comprehensive insight from Cyprus auditors

in 2024, Transfer Pricing

Transfer pricing regulations govern intercompany pricing for goods, services, royalties and loans between companies, in a cross-border context. In light of OECD (Organisation for Economic Co-operation and Development’s) base erosion and profit shifting (BEPS) initiative, multinational companies may now need to establish a transfer pricing policy. Our Cyprus auditors at Yiallourides and Partners are here to help with all the information you need to know.

In June 2017, Cyprus Tax Authorities introduced the concept for Group Financing Companies and subsequently in 2022 for all other intra group transactions including royalties, trading, and services. All tax consultants in Cyprus are aware of these issues, but you should also know about them if you own/operate a business in Cyprus.

Why do I need a Transfer Pricing report?

The arm’s length principle (Article 33 of the Income Tax Law 2002) is the cornerstone of transfer pricing rules and regulations in Cyprus and is codified in. As per Article 33, any commercial or financial transactions between related parties are taxed on the profits that would have accrued if the transactions had been at arm’s length between independent parties. 

Moreover, in line with the OECD BEPS Action 8-10 targeting the erosion of the taxable base and the shifting of profits to jurisdictions with low or even zero tax rates, you ensure that your group is navigated in safe waters and that no unpleasant disputes with the local and or foreign Tax Authorities arise. The necessity that arises is not just for complying with the Tax Law but also to optimise the tax planning of the group.

It is essential that a transfer pricing study is prepared (and it is recommended to use Cyprus auditors for that) preceding the actual transaction to do so. A Transfer pricing study is also a necessary tool for the directors and management of the group to ensure that all transactions are at arm’s length. In cases where the company provides loans, it is also an important tool for the directors to be able to monitor the probability of default of the loans.

The key developments of the Law in Transfer Pricing studies in Cyprus

June 2017 / Cyprus Tax Authorities have introduced the concept for intra-group financing activities, along with guidance in terms of substance and transfer pricing requirements (replacing the Minimum Margin Scheme regime applicable until 30 June 2017). Tax Authorities issued a circular, taking into account the guidance from the OECD BEPS Action 8-10, stating that a transfer pricing study should be prepared for intra-group back-to-back financing transactions. No minimum threshold was set.

It was stated that the following principles must be applicable by the Cyprus Financing Company:

  • The company controls the financial risks associated with its funding and makes its own assessment of whether the party receiving the money is creditworthy.
  • The company maintains an audit trail on critical functions and risks assumed in relation to the intercompany loan, including creditworthiness analysis of the borrower.
  • The financing company must have an actual presence in Cyprus.

The term actual presence is not officially defined nor regulated, yet the following actual presence criteria are detailed in the Circular:

  • The majority of board directors members should be Cyprus tax residents.
  • The majority of the board of directors meetings must be held in Cyprus and the main management and commercial decisions must be made in Cyprus.
  • The majority of the shareholders meetings must be held in Cyprus.
  • The financing company must have qualified personnel controlling and managing the financing transactions, such as Cyprus auditors.

June 2022 / A new law is introduced, stating that all intra-group transactions including financing, royalties, services and trading that exceed the minimum threshold of EUR 750.000 must prepare a TP study.

January 2023 / The Commissioner of Taxation with Circular 1/2023 informs that the provisions of Interpretive Circulars No.3 and No.5 relating to “back-to-back” financing arrangements are retroactively terminated as of 31 December 2021. In that respect, as from 1/1/2022, companies can not apply the simplification measures on the intra-group “back-to-back” financing transactions (taxable profit margin of 2%). These numbers can be further explained to you by any company of tax consultants in Cyprus.

June 2023 / Circular 6 is issued by the Tax Authorities that clarifies the requirements for all transactions below the minimum threshold (see below).

June 2023 / Circular 7 is issued by the Tax Authorities that clarifies the preferred methodology to be used in TP studies.

February 2024 / Tax Authorities issue a memo that clarifies the new thresholds applicable retrospectively as from 1 January 2022, that governs all intra group financing transactions exceeding EUR5,000,00 and all other transactions exceeding EUR1,000,000.

This may seem a bit complex to understand, especially if you are not familiar with the material that Cyprus auditors or tax consultants in Cyprus handle, but we will try to make it clearer.

TP ADDITIONAL INFORMATION (it is recommended to consult Cyprus auditors on the matter, if anything is unclear)

Transactions covered

The Transfer Pricing Law and regulations cover all types of transactions between related parties in excess of €1,000,000 per category of transactions, except financial services.

The relevant transactions include:

–      Goods

–      Services

–      Intellectual properties (licensing, disposals etc.)

–      Any other types of transactions

The threshold for Financial Services is €5,000,000

New definition of a related party

Two or more persons are considered related if they act together (or take directions) to directly or indirectly:

  •  hold 25% of the voting rights or share capital, or
  •  have the right to at least 25% of the profit of a company.

TP methods examined amongst others

The Capital Asset Pricing Model approach (“the CAPM” as it is known by tax consultants in Cyprus) was used to determine whether a company engaging in financing activities earns an adequate spread or return on equity on the loans given to related parties that are financed through the use of related party loans.  The average spread earned was calculated with reference to the average interest that the company pays for its financing (from related parties). The method uses the Arm’s Length Return on Equity.

The Comparable Uncontrolled Price (“CUP”) method basically compares the terms and conditions (including the price) of the loans received and the loans given, to those offered to a third-party transaction, and evaluates whether the amount charged in the controlled transaction complies with the arm’s length principle.

The Transactional Net Margin Method (“TNMM”) is a method that examines the net profit margin relative to an appropriate base (e.g. costs, sales or assets) that a taxpayer realises from a controlled transaction.

What will the TP Report from Cyprus auditors include?

The TP Report can be prepared by tax consultants in Cyprus and it will include in summary the following:

  • Executive summary
  • Description of the intra group activity
  • Documentation and sources used
  • Risk analysis
  • Functional analysis
  • Arm’s length remuneration summary and conclusions
  • Tax residency
  • Independence and competence of the Board
  • Credit rating of borrowers
  • Methodology

Local file contents

  • General description of group activities
  • Group structure, showing tax residency and jurisdiction of establishment for each entity
  • Annual audited financial statements by Cyprus auditors (management accounts if audited are not available)
  • Summary of financial information used
  • Summary schedules of relevant financial data for comparable used
  • Management structure of the local entity
  • Business strategy of the local entity
  • Key competitors of the local entity
  • Description of intercompany transactions
  • Detailed functional analysis, with respect to each documented category of controlled transactions, and any changes compared to the prior year

Master File contents

Note – this is an obligation only for an Ultimate Parent Entity (UPE) or Surrogate Parent Entity (SPE) of an MNE Group, which is subject to CbCR (i.e. Group has consolidated revenues exceeding EUR750M). Also, this can all be created with the help of Cyprus auditors and/or tax consultants in Cyprus.

  • Legal and ownership structure
  • Jurisdiction of tax residency and establishment of entities
  • Description of the MNE’s business activities
  • Drivers of business profit
  • Supply chain for the group’s largest products/services
  • Important service arrangements between members of MNE Group and corresponding TP policies
  • Main geographic markets for the group’s products and services
  • Brief functional analysis contribution analysis to value creation by individual entities within the group
  • Important facts acquisitions and divestitures
  • Overall strategy concerning the intangibles development, ownership, exploitation, management, location of principal R&D facilities and R&D decision making
  • General description of group TP policy for R&D and intangibles
  • Details of any important transfers of IP
  • List of important intangibles and which entities legally own them, as well as the relevant intercompany agreements
  • Description of how the group is financed, both from related and unrelated lenders
  • Description of the general transfer pricing policies related to intercompany financing arrangements
  • Identification of any members of the group that provide a central financing function for the group, including the country under
  • Annual consolidated financial statements

Once again, we emphasise the benefits of involving a firm of Cyprus auditors in the process.

Advance Pricing Arrangement (APA)

Cyprus tax resident persons and non-Cyprus tax resident persons that have a permanent establishment situated in Cyprus, may submit to the CTD an APA Request with respect to current or future domestic or cross border Controlled Transactions. Do you fall into this category? You should check with tax consultants in Cyprus just to be on the safe side.

The APA request may cover the various conditions and assumptions relevant for determining the arm’s length pricing of the Controlled Transactions for a specified period, including:

  • the critical assumptions on the functional and risk profile of the parties involved,
  • the relevant market conditions,
  • the applicable TP method to be followed,
  • the identified uncontrolled comparable transactions and any necessary adjustments made to determine,
  • the arm’s length price range,
  •  any other specialised matter relating to the pricing of the Controlled Transactions.

Once again, this can all be done with the help of Cyprus auditors. The CTD examines the APA request and approves or rejects it.

Timeline: The CTD should issue the APA decision within 10 months (the CTD may notify extension of this deadline up to 24 months) from the date of submission of the APA request by the taxpayer. The APA decision may be applicable for a maximum term of four years. It is recommended to keep track of the request, with the help of tax consultants in Cyprus.

However, it cannot apply for any tax year prior to the tax year in which the request is submitted.

Bilateral and Multilateral APAs: The APA request for cross border Controlled Transactions may be bilateral or multilateral, involving the tax authorities in other jurisdiction(s) with which Cyprus has concluded a Double Tax Treaty. In such cases, a corresponding request needs to be filed by the taxpayer with the authorities in the other jurisdiction(s), and the CTD may consult in writing with such authorities under the relevant mutual agreement and exchange of information procedures and applicable EU legal framework, for the purpose of issuing the APA decision. For more information regarding that, you can consult a firm of Cyprus auditors.

Validity of APA decision: The prices of the Controlled Transactions covered by an APA decision will be considered as arm’s length, provided that any conditions included in the APA decision are met, and that the critical assumptions on which the APA was based continue to be valid and applicable. If you feel unsure about this, do not hesitate to approach any firm of tax consultants in Cyprus, including us here at Yiallourides and Partners.

An approved APA decision is considered binding, but it can be revised during its agreed term upon request of the taxpayer or at the discretion of the CTA, only if:

  • the critical assumptions on which the APA decision was based are proven incorrect; or
  • the conditions or critical assumptions on which the APA decision was based have substantially changed so that it is impossible to apply the APA decision; or
  • if an arbitration process is followed for transactions covered by the APA decision, under an effective Double Tax Treaty or under the EU Arbitration Convention on the elimination of double taxation in connection with the adjustment of profits of associated enterprises.

If you need to know more about double tax treaties, you can talk to us at Yiallourides and Partners, or consult another well-recognised firm of Cyprus auditors of your choice.

Revised APA decisions issued by the CTD shall apply for the remainder of the term of the original APA decision. The CTD may revoke an APA during its term (in which case the APA is considered as not issued) if it is established that:

  • the critical assumptions on which the APA was based were incorrect due to misinterpretation of fault attributed to the taxpayer; or
  • the taxpayer has failed to comply with one or more of the key terms and conditions included in the APA.

An APA may be cancelled by the CTD at any time during its term, if it is established that:

  • there is a significant change to the critical assumptions and conditions on which the APA was based; or
  • the taxpayer has failed to comply with key terms of or obligations described in the APA; or
  • there is a substantial change in the applicable tax provisions which significantly affect the APA.

An APA cannot be cancelled if it may be revised. Nevertheless, when cancelled, the APA ceases to be in effect from the relevant date specified in the cancellation decision issued by the CTD. Cancellation of an APA is also something that Cyprus auditors can provide more data about. Also, if this has happened to you, please do not wait, and consult the help of tax consultants in Cyprus, in order to prevent unnecessary damages to your business.

Administrative Penalties, in case of Failure to provide Local File or Master File upon request

If notice from CTD to provide TPD (within 60 days) is received but the taxpayer fails to do so, these are the possible fines:

  • EUR 5,000 if submitted from 61 days to 90 days after request date
  • EUR 10,000 if submitted from 91 days to 120 days after request date
  • EUR 20,000 if submitted 120 days after request date

In the case of non-submission of the TP Documentation File following the notification by the CTD of a request for submission, a penalty of EUR 20,000 will apply. That’s why it is important to consult your Cyprus auditors and avoid the hefty penalty. Also, tax consultants in Cyprus can give you more information on these numbers and dates.

Circular 6/2023 – Transactions that fall below the Local File threshold

On 6 July 2023, the Cyprus Tax Department (“CTD”) issued a circular with respect to transactions that fall below the Local File threshold. The Circular applies to all taxpayers with related party transactions (“Controlled Transactions”), which are exempted from the obligation to be documented in a Cyprus Local File.

The new Circular provides for simplified documentation to be prepared for Controlled Transactions that do not exceed the threshold (regardless of category) and is applicable as from 2022. Your Cyprus auditors should know all about it, but here are some important pointers. The main provisions of the Circular are outlined below:

  1. Simplified Transfer Pricing documentation requirements

Taxpayers falling under the provisions of the Circular, who are eligible to maintain simplified Transfer Pricing (“TP”) documentation based on the above, will be required to include minimum contents in such documentation, which should be kept on file to support their compliance with the arm’s length principle for their Controlled Transactions:  

  1. Brief description of the functional analysis
  2. A description of the of the entity
  3. The reasons for the chosen TP method being considered the most appropriate one
  4. Determination of the arm’s length price/remuneration based on the benchmarking analysis undertaken 

2. Safe harbours for certain types of transaction – The Circular also introduces safe harbours for the following four types of sub-categories of Controlled Transactions: 

I. Financing transactions such as loans or cash advances granted to related parties, which are funded out of financial means (such as bonds, loans from related parties, interest free loans from the shareholders, cash advances and bank loans). The safe harbour applies regardless of whether the taxpayer assumes the risks of the financing activity.

II. Loans or cash advances receivable from related parties which have been funded out of own capital (e.g. issued share capital and share premium, non-return capital contributions, and retained earnings).

III. Funding received from related parties (through interest bearing loans, bond issuance, or cash advances) to the extent that the funds borrowed are used in the business.

IV. Low value-adding services.

The Circular emphasises that in order to be able to use a safe harbour, the total aggregate value of Controlled Transactions should not be higher than €5,000,000 for financing arrangements and €1,000,000 the other transactions for the tax year. The safe harbours covered by the Circular relate to certain sub-categories of financing activity as well as to low value adding services, and they are as follows:

  • The safe harbour amounts stated above are before the deduction of taxes.
  • In the case where the yield rate of the ten-year government bond is negative, the safe harbour rates for transactions described under II and III should amount to 3.5% and 1.5%, respectively. Also for I, II, and III, in addition to the principal amount, the relevant safe harbour should also be applied to any interest charged but not paid

 Transactions eligible for safe harboursSafe harbour provision
I.Loans or cash advances to related parties which are funded out of financial means.Minimum return of 2.5% (after the deduction of allowable expenses).
II.Loans or cash advances receivable from related parties which are funded out of own capital.Minimum return should be equal to the yield rate (as at 31 December of the prior tax year) of the 10-year government bond of the country in which the borrower operates, increased by 3.5%.
III.Loans payable to related parties to the extent that the funds obtained are used in the business.Cost of borrowing must not exceed the yield rate (as at 31 December of the prior tax year) of the ten-year government bond of the Republic of Cyprus, increased by 1.5%.
IV.Low value-adding services5% mark-up on the relevant costs.

The safe harbour amounts stated above are before the deduction of taxes (ask your tax consultants in Cyprus about this matter).

In the case where the yield rate of the ten-year government bond is negative, the safe harbour rates for transactions described under II and III should amount to 3.5% and 1.5%, respectively. Also for I, II, and III, in addition to the principal amount, the relevant safe harbour should also be applied to any interest charged but not paid. More information regarding safe harbours can be obtained from all licensed Cyprus auditors.

*Important note – Dac6 obligation for the use of safe harbours rules ifthere are two countries involved and you are using any of the below:

 Transactions eligible for safe harboursSafe harbour provision
I.Loans or cash advances to related parties which are funded out of financial means.Minimum return of 2.5% (after the deduction of allowable expenses).
II.Loans or cash advances receivable from related parties which are funded out of own capital.Minimum return should be equal to the yield rate (as at 31 December of the prior tax year) of the 10-year government bond of the country in which the borrower operates, increased by 3.5%.
III.Loans payable to related parties to the extent that the funds obtained are used in the business.Cost of borrowing must not exceed the yield rate (as at 31 December of the prior tax year) of the ten-year government bond of the Republic of Cyprus, increased by 1.5%.
IV.Low value-adding services5% mark-up on the relevant costs.

We can help!

Yiallourides & Partners Consultants Ltd employs Cyprus auditors, tax consultants in Cyprus and transfer pricing professionals, with over 7 years of experience and a large number of studies in their portfolio, supported by our global alliance tax experts. This allows us to carefully consider all sides of virtually any transfer pricing situation by enlisting local country transfer pricing expertise, whenever and wherever the need arises.

We use the most advanced software for our Transfer Pricing reports that provides the data and process driven tax analysis tools that are used by tax authorities globally and all major advisory firms in high scrutiny countries.

For more details, please contact:

Managing Director

George Yiallourides

yiallourides@yiallouridesconsultants.com.cy

Tax Manager

Ioannis Charalampous

ioannis@yiallouridesconsultants.com.cy

05/01/2024

Tax Calendar 2024

in 2024, Tax

Dear clients/associates

Year 2024 is here and it is time to start planning ahead for tax payments. 

It is advisable that you follow this tax diary and comply with your tax obligations in order to avoid paying unnecessary penalties and interest. 

Tax diary can be downloaded using the following link:

http://www.ayca.com.cy/wp-content/uploads/2024/01/CYPRUS-TAX-CALENDAR-2024-1.pdf

Our experienced tax team is available for any clarifications and or assistance.

* The information contained in our publication is accurate as of the day of release. 

Contacts:

Managing Director

George Yiallourides

yiallourides@ayca.com.cy

Tax Manager

Ioannis Charalampous

ioannis@ayca.com.cy

18/07/2023

New circulars issued by the Tax Authorities, 6/2023 and 7/2023

in 2023, Tax

This is a tax update in reference to the new circulars issued by the Tax Authorities, 6/2023 and 7/2023 in reference to Transfer pricing studies.

Technical circular 6/2023
Simplification measures for persons exempted from the obligation to comply with the documentation in a Cyprus Local File based on paragraph (9)(a) of article 33 of the Income Tax Law.

1. This circular provides guidance on documenting the price of controlled transactions and introduces simplification measures in sub-categories of transactions in case of exemption of a person from the obligation to comply with the documentation in a Cyprus Local File based on paragraph 9(a) of article 33 of the Income Tax Law N.118(I) 2022 as amended (ref “Income Tax Law”) which was inserted into the basic law by the amending law N.101(I) 2022 effective from 01/01/2022.

A. Where is applicable;

2. The circular applies to any business carried on by a person resident in the republic or from a permanent establishment in the republic of a person who is not a resident of the republic (ref “the business”), regarding controlled transactions that cumulatively per category do not exceed or would not exceed, based on the principle of transfer pricing seven hundred fifty thousand euros (€750.000) per tax year, as a result of which they are exempt to comply with the documentation in a Cyprus Local File, based on the provisions of paragraph (9)(a) of article 33 of the Income Tax Law.

B. Arm’s length principle and minimum documentation required

3. According to the provisions of paragraph 1 of article 33 of the Income Tax Law, the satisfaction of the arms length principle, is achieved in the event that the terms are set or imposed between two businesses, regarding their commercial or financial relations which do not differ from the conditions that would be established between independent parties. However, in the event that the terms in question between two businesses differ from those set between independent businesses, any profits or benefits, which if these terms were not set would be carried out from one of the businesses but due to these terms did not take place, then they could be included in the profits or benefits of the business and taxed accordingly.

4. In the context above, the minimum documentation is required to comply with the principle of transfer pricing for persons exempted from the obligation to comply with the documentation in a Cyprus Local File and and conduct controlled transactions in any transaction category specify as follows:

a) Brief description of the functional analysis (functions, assets, risks)

b) Description of the characterization of the entity, based on the results of the functional analysis

c) Record the reasons that make the selected pricing method the most appropriate

d) Determining the equidistant value based on comparability search results of internal or external comparable depending on the case or any other relevant analysis were based on the guidelines of OECD, it is advisable to use valuation models as in the case of financial guarantees.

5. It is understood that in the event that the business that exempts you from the obligation to observe Cyprus Local File and at the same time chooses to use a simplification measure for one or more transaction subcategories, the minimum required documentation to comply with the principle of equal distances as described in paragraph 4 is limited to the points 4.a) and 4.b) of this circular for the subcategory for which the use of the simplification measure is chosen. Furthermore, it is pointed out that beyond points 4.a) and 4.b), additional documentation is required for each subcategory as specified below in section D.

C. Horizontal layout regarding the choice to use a simplification measure(s)

6. The subcategories for which any business exempt from the obligation to comply with the documentation in a Cyprus Local File has the possibility to choose the use of any simplification measure are the following:

a) “Financing transactions between related parties financed by financial instruments, Section D.1”
b) “Financing transactions to equity- financed related parties, Section D.2
c) “Financing transactions from related parties to the extent that they are used in the business, Section D.3”
d) “Low value- adding Services), Section D.4”

7. The horizontal arrangements regarding the use of simplification measures for the four subcategories are as follows:

a) The use of the distance measure should be accompanied by the required additional minimum documentation as specified for each sub-category of Section D of this circular
b) The minimum documentation as specified in paragraph 4 or and paragraph 5 and Section D, is available to the Tax Collector whenever requested by them within 60 days from the receipt of the relevant request, either from the business, or a person authorized by the business to act as a representative for that purpose
c) The minimum or maximum rates of return/ profit mark-up which are specified below in paragraphs 14, 18, 25 and 31 will be reviewed periodically by the Tax Department based on the facts and the circumstances of the relevant purchases of each category of transactions and the conditions of the global and domestic economy or/and any other factors or criteria that the tax commissioner deems relevant when re-examining and re- determining the said minimum or maximum rates of return/profit mark-up
d) Deviation is not allowed from the height of the minimum or maximum performance rates / profit mark-up, as specified below in paragraphs 14, 18, 25 and 31 unless the deviation is documented properly from the minimum documentation set out in paragraph 4 of this circular. It is highlighted that if the accounting profit from the controlled transactions is higher than what condemned from the result of the transfer pricing study as well as the percentage that is allowed from the simplification measure, the Tax Department will not make any downward adjustment of the taxable income (in accordance with the provisions of the article 33(5) of the Income Tax Law to the extent that is applied
e) The business should declare to the Tax Department the use of a simplification measure for one or more transaction subcategories in case of their choice, filling electronically the relevant part of the tax return/ in the controlled transaction information summary table, the latest by the obligation date to submit the income statement of the liable person for the tax year referred to.

8. A necessary condition for the use of a simplification measure for one of the four subcategories of this circular is that the sum of the transactions both for the subcategory the simplification measure is being used for as well as the controlled transactions that belong to the same category in which the subcategory falls to not exceed or has not exceeded based on the transfer pricing principle the seven hundred fifty thousand euros (€750.000) per tax year.

9. Under no circumstances can a business benefit from a simplification measure in any of the four subcategories as described in section D, provided the business has a compliance to maintain a Local file for the category in which the subcategory falls, i.e., the total number of controlled transactions exceeded or would exceed, based on the transfer pricing principles, the seven hundred fifty thousand euros (€750.000) per tax year.

10. It is understood that in the event that the business carries out controlled transactions in one of the four sub-categories and at the same time possesses internal comparable (paragraphs 3.27 and 3.28 OECD) which should be used to determine the transfer pricing with regards to the controlled transactions then the simplification measure is not allowed to be used in that subcategory.

11. The use of unilateral safe harbour rules as defined in paragraphs 14,18,25 and 31, from a business which conducts cross border transactions makes the transactions in question declares cross border regulations according to the article 2(1)5 and the appendix IV, Part II,OECD as amended. In accordance with the provision of the regulation 42(2) 438/2021, the use of unilateral safe harbor rules should always take place in the context of intra-border cross-border transactions as prerequisite.

D. Simplification measures
D.1 Financing transactions between related parties financed by financial instruments

12. For the purposes of this particular circular, the term “financing transactions between related parties financed by financial instruments” refers to any activity related to granting loans or cash advances of affiliated entities or to related parties bearing interest ( or should be bearing interest), financed by financial instruments such as bonds, loans from affiliated entities or related parties including interest – free loans by the shareholders of the business, cash advances and loans from credit institutions.

13. The functions of a business that conducts financing transactions, as described in paragraph 12, are related to the process of creating a loan and the subsequent negotiation of a loan, including functions related to risk control. These functions are included in Section B of part II of the 2010 OECD report ON THE ATTRIBUTION OF PROFITS TO PERMANENT ESTABLISHMENTS. Clarifying that even though the subject of the said report, concerns the sharing of profits in permanent installations, however, the section under reference B of II of the report is the best representation of the operations of a business that conducts financing transactions and its use in these cases is prohibited. It is understood that characterizing such activity as described in paragraph 12 is not affected by the number, the nature, maturity or other characteristics of the loan or cash advance.

14. Any business that carries out financing transactions as described in paragraph 12, that is, granting loans or cash advances to affiliated entities or to related parties which are financed by bonds or loans or cash advances received from affiliated entities or related persons or from credit institutions, regardless of whether the business has the financial capacity to undertake equity risks it is considered for simplification reasons that the transactions comply to the transfer pricing principle if the business under consideration receives in relation to the controlled transactions the minimum yield of two and a half (2.5) percentage points before tax deduction. Understanding that the said output is after the expenses deduction which represent amounts that were allocated or spent entirely and exclusively for the purpose of acquiring the income in question.

15. The minimum output applies to the value of loans receivable which are financed from financial instruments. It is specified that the minimum output percentage of paragraph 14, applies to the average term of the principal of the receivable loan during the tax year in question including interest charged and not collected.

16. The business that chooses the application of the above simplification measure for loans that fall under the subcategory “financing transactions between related parties financed by financial instruments” will have to prepare the following additional minimum information and documentation:

a) Detailed description of the loans for which the simplification measure is used (dates of conclusion of the loan agreements, loan amounts, loan balances at the end of the tax year, repayment dates, collateral, interest rates, details of any amendments to loan agreements etc.)
b) Listing the reasons justifying that the loans meet the definition “financing transactions between related parties financed by financial instruments” as specified in paragraph 12 of Section D.1
c) Numerical analysis, reconciliations and explanation regarding the use of the simplification measure on controlled transactions for the purposes of determining the taxable income of the liable person.

D.2 Equity-financed related party financing transactions

17. For the purposes of this circular, the term related party financing transaction to the extent that it is financed by equity, refers to any activity related to the granting of loans or cash advances to affiliated entities or to related persons that bear interest (or should bear interest), financed by the company’s own funds i.e. funds that have been brought into the business through the insurance of share capital or from the issue of shareholders at a premium, to the extend that these have been paid, non-reciprocal capital contribution or and funds from own resources which came from profits from the conduct of business activities.

18. Based on paragraph 1.64 of OECD guidelines, if the financing comes from equity, as described above, the lender, that is the business, is deemed to have the financial capacity to assume the risks associated with granting loans or cash advance to related parties or related persons. In view of the assumption of risks associated with the transactions in question, for simplification measures, the transactions comply with the transfer pricing principle, if the business receives in relation to the controlled transactions under consideration, the minimum output, which is equal to the yield rate of a ten year government bond of the state in which the borrower activity is increased by three and a half (3.5) percentage units before tax deduction.

19. The minimum output applies on the value of the loan receivable to the extent the equity finances. The percentage of minimum output applies to the average of the receivable loan capital (to the extent financed by equity) during the tax year period in question including interest charged and not collected.

20. If the business finances persons who operate in different states, then the output of each loan will be calculated and applied separately, based on the yield rate on the state’s ten-year government bond, in which the borrower activity is increased by three and a half (3.5) percentage units before tax deduction.

21. The reference interest rate of the ten-year government bond, of the state in which the borrower activity is equal to the interest rate on 31st December of the previous year of the tax year in question. It is clarified that in the cases where the said reference rate is negative, then it will not be considered in its calculations and the minimum output in these cases will be equal to three and a half (3.5) percentage units before tax deduction.

22. Meaning that the output interest rate of the state’s ten-year government bond in which the borrowers activity varies from year to year, then the minimum output as described above will be adjusted each tax year in question.

23. The business that chooses the application of the above simplification measure for loans that fall under the subcategory “equity financed related party financing transactions” will have to prepare the following additional minimum information and documentation:

a) Detailed description of the loans for which the simplification measure is used (dates of conclusion of the loan agreements, loan amounts, loan balances at the end of the tax year, repayment dates, collateral, interest rates, details of any amendments to loan agreements etc.)
b) Listing the reasons justifying that the loans meet the definition “equity financed related party financing transactions” as specified in paragraph 17 of Section D.2
c) Numerical analysis, reconciliations, and explanation regarding the use of the simplification measure on controlled transactions for the purposes of determining the taxable income of the liable person.

D.3 Related party financing transactions to the extent they are used in the business

24. For the purposes of this circular the term “Related party financing transactions to the extent they are used in the business” refers to receiving loans, bonds or cash advances from affiliate parties or related persons bearing interest to the extent that the said granting of loans or financial facilities used to invoke the basis of the articles 5(1) and 5(2) of the Income Tax Law.

25. For simplification reasons, the transactions described above in paragraph 24 comply to the transfer pricing principle, if the borrowing cost of the considered business in relation to the controlled transactions does not exceed the yield rate on the ten-year government bond of the Republic of Cyprus, increased by one and a half (1,5) percentage units before tax deduction.

26. The benchmark interest rate of the ten-year government bond of the Republic of Cyprus equals the interest rate as of the 31st of December of the tax year preceding the tax year under consideration and applies on the value of the loan payable to the extent used by the business based on article 5(1) and 5(2) of the Income Tax Law. The minimum output percentage applies to the average of the principle of the loan payable (to the extent used by the business based on article 5(1) and 5(2) of the Income Tax Law during the tax year under consideration including interest charged and unpaid.

27. It is specified that if the reference rate in question is negative then it will not be considered for the calculation of the maximum efficiency and the maximum output in such cases is equal to one and a half (1,5) percentage units before tax return.

28. Meaning that the rate of return of the ten year government bond of the Republic of Cyprus equals the interest rate as of the 31st of December varies from year to year, then the maximum output as described above will readjust each tax year under consideration.

29. It is understood that the simplification measure of the subcategory “related party financing transactions to the extent they are used in the business”.

30. The business which chooses to apply the above simplification measure for the loans falling under the subcategory “related party financing transactions to the extent they are used in the business” will have to prepare the following additional minimum information and documentation:

a) Detailed description of the loans for which the simplification measure is used (dates of conclusion of the loan agreements, loan amounts, loan balances at the end of the tax year, repayment dates, collateral, interest rates, details of any amendments to loan agreements etc.
b) Listing the reasons justifying that the loans payable satisfies the definition “related party financing transactions to the extent they are used in the business” as specified in paragraph 24 of Section D.3
c) Numerical analysis, reconciliations, and explanation regarding the use of the simplification measure on controlled transactions for the purposes of determining the taxable income of the liable person.

D.4 Low value-adding services

31. Any business conducting controlled transactions, which are low added value services, as analysed below in paragraph 32 are considered, to comply with the transfer pricing principle if the business in question receives in plan with the under consideration controlled transactions, the minimum profit mark-up of five (5) percentage units on the related costs, as defined in Part D.2.2 (paragraphs 7.56-7.62) of the 7th chapter of the OECD guidelines.

It is understood that if the business in question is the recipient of the low value-added services and not the service provider, then the profit mark-up of five (5) percentage units of the relevant costs defines as the maximum acceptable profit margin. For more details on the method that should be applied regarding the allocation of the relevant costs for the audited entities and the application of the profit margin on the said expenditure please refer to parts D.2.2, D.2.3 and D.2.5 of the seventh chapter of the OECD guidelines.

32. According to paragraph 7.45 of the OECD guidelines, services of low added value for the purposes of the simplification measures are the services provided by one or more members of the group on behalf of one or more members of the group, which:

a) Are supportive in nature
b) They are not part of the main activities of the group (that is, they do not create profit-making activities or do not contribute to financially important activities of the group)
c) They do not require the use of unique and asset yards and do not result in the creation of unique and asset yards
d) They do not presuppose the assumption or control of a large or significant risk by the service provider and neither raise a significant risk to the service provider.

For examples of services that likely meet the definition of a low value-added service, see paragraph 7.49 of the OECD guidelines.

33. It is specified that the following activities do not meet the conditions for the use of simplification measures and therefore are not considered services of low added value:

a) Services that constitute the core activity of the group
b) Research and development services (including software development unless they fall within the scope of the technology or information services of paragraph 7.49 of the OECD guidelines)
c) Manufacturing and production services
d) Purchasing activities related to raw materials or other materials used in the manufacturing or production process
e) Activities related to sales, marketing, and distribution
f) Financial transactions
g) Mining, exploration, and processing of natural resources
h) Insurance and reinsurance
i) Services of the supreme etheric administration (extracting the supervision of the management of the services which are characterized as intra-group services of low added value as defined in paragraph 7.45 of the OECD guidelines)

34. The business which chooses to apply the above simplification measure will have to prepare the following additional minimum information and documentation:

a) Description of the categories of low added value intra-group services provided
b) Identity of the holder
c) Reasons justifying that, each service category is an intra-group service of low added value, within the definition set out in paragraph 32 of this circular
d) Description of the selected distribution keys
e) Documentation and calculations showing cost group determination, as described in section D.2.2 of the seventh chapter of the OECD guidelines and of the applicable profit margin thereon, a list of all the categories and the amount of the related expenses, including the cost of any services provided exclusively to a member of the group
f) Calculations showing the application of specified allocation keys
g) Numerical analysis reconciliations and explanation regarding the use of the simplification measure on controlled transactions for purposes of determining the taxable income of the liable person.

Technical circular 7/2023

Pricing based on the transfer pricing principle for cases of businesses carrying out back-to-back type financing transactions.

With this circular it is pointed out that for the tax year 2023 onwards, the tax collector considers the most appropriate method for transfer pricing is the comparable uncontrolled price method as clearly indicated by the OECD guidelines, which state that “the widespread existence of loan markets and the frequency of such transactions between independent borrowers and lenders, combined with the wide availability of information and market analysis related to loans facilitate implementation of the uncontrolled pricing comparison method”.

1. The comparable Uncontrolled Price method requires as comparatives the arm’s length interest rates and please note that this method also applies to any claim which:

a) Conducts back-to-back financing transactions type and said transactions are considered as loans against accurate delineation as described in chapter I of the OECD guidelines.
b) Based on the results of the functional analysis operations, assets and risks, qualifying as a financing claim with operational and financial ability to undertake assumption of risk, i.e., Executes the control risk and has sufficient equity capital to be able to absorb the loss if the risks in connection with the financing transactions take place.

See section C.1.2.1 of chapter 10 of the OECD guidelines for more complete relevant information.

2. a) Emphasize that only in exceptional cases will you allow the use of any method other than the of comparable uncontrolled pricing for the businesses that meet the assumptions of the above paragraphs 1a and 1b. In these cases you should secure prior approval from the tax authority through the general procedure for submitting tax opinions.

b) In these exceptional cases the business should additionally provide the following information:

i) The reasons for which the comparable uncontrolled pricing method is considered less appropriate or not applicable under specific circumstances. in support of such claim the interest rate comparability search results should be submitted
ii) Detailed analysis to support the claim that the chosen alternative method results in satisfactory pricing of the transfer pricing principle based on the the OECD guidelines
iii) The reasons for which the other method provides a better solution than the comparable uncontrolled pricing method.

In summary of the two above mentioned circulars in cases you have intra group transactions below the 750k threshold you should refer to the Technical circular 6/2023 and or seek for guidance and that CUP method should be also included in a transfer pricing report in cases of back to financing loans.

For any further clarifications please contact:

George Yiallourides
Managing Director
T: +357 25443132
E: yiallourides@ayca.com.cy

Yiannis Charalampous
Tax Manager
T: +357 25443132
E: ioannis@ayca.com.cy

Flowers and butterfly
19/06/2023

Amendments to the Income Tax Law and Special Contribution for Defence Law aiming to prevent aggressive tax planning

in 2023, Tax

This brief memo is to remind you that, the Laws that were implemented in December 2021, aiming to prevent aggressive tax planning, are effective as of 31 December 2022. The new measures have been implemented by EU Member States against EU-blacklisted jurisdictions.

As per the new Law, Cyprus Companies, under certain conditions, explained here below, must apply to withhold tax on dividends, interest, and Royalties. That is paid to the EU Blacklist of non-cooperative jurisdictions (“EU Blacklist”) (Amending the SCDL).

Dividends

A 17% withholding tax must be applied on dividends paid by a Cyprus tax resident Company to companies which are:

  • resident in jurisdictions included in the EU Backlist, or
  • incorporated/registered in a jurisdiction included in the EU Blacklist and are not tax resident in any other jurisdiction that is not included in the EU Blacklist.

The following conditions must apply:

  • The Company receiving the dividend holds directly, either alone or jointly with associated companies, over 50% of the capital, voting rights, or is entitled to receive more than 50% of the profits in the company paying the dividends.
  • The associated companies should also be resident in an EU blacklisted jurisdiction or incorporated/ registered in an EU blacklisted jurisdiction and are not tax resident in any other jurisdiction that is not included in the EU Blacklist.

There is no withholding tax when the dividend is payable on shares listed on a recognised stock exchange.

Interest

A 30% withholding tax on interest paid by a Cyprus tax resident company to companies which are:

  • resident in jurisdictions included in the EU Blacklist, or
  • incorporated/registered in a jurisdiction included in the EU Blacklist and are not tax resident in any other jurisdiction that is not included in the EU Blacklist.

The withholding tax does not apply in the case of:

  • interest payments on securities listed on a recognised stock exchange.
  • Interest payments made by individuals.

Royalties

A 10% withholding tax on royalties paid by a Cyprus tax resident company to companies which are:

  • resident in jurisdictions included in the EU blacklist, or
  • incorporated/registered in a jurisdiction included in the EU Blacklist and are not tax resident in any other jurisdiction that is not included in the EU Blacklist.

The WHT does not apply in the case of royalty payments made by individuals.

Pending clarification

We are expecting a clarification from the Tax Authorities on whether the withholding must be applied on cash basis (i.e. when actually paid) or when derived (i.e. on accruals basis).

For easy reference, to the consolidated list as of 17/02/2023 of high-risk countries (EU HIGH-RISK THIRD COUNTRIES, FATF HIGH-RISK AND NON-COOP, EU TAX LIST) click here.

Finally, in order to strengthen the residency rule framework beyond the management and control criterion/concept, the term Cyprus tax resident company now includes a Company that was incorporated/registered in Cyprus. Whose management and control is exercised outside Cyprus, as long as the company is not a tax resident in any other State.

For more details, please contact:

George Yiallourides
Managing Director
T: +357 25443132
E: yiallourides@ayca.com.cy