Circular on tax treatment of intra-group back-to-back financing
This Circular applies to any company carrying out group financing transactions (hereinafter referred to as a group financing company) meaning any entity that conducts intra-group financing transactions. For the purposes of the preceding sentence, the activities related to holding of participations are not taken into consideration. Further, this Circular applies to companies that are Cyprus tax resident, namely companies whose management and control are exercised in Cyprus, as per Section 2 of the Income Tax law 118(1)/2002 as amended (ITL). It also applies, mutatis mutandis, to companies that are tax resident outside Cyprus and have a permanent establishment in Cyprus as per Section 2 of the ITL and in such case the Circular applies to the extent that it is relevant to the taxation of the Cyprus permanent establishment.
For the purposes of this Circular, the term intra-group financing transaction refers to any activity consisting in the granting of loans or cash advances remunerated by interest (or should be remunerated by interest) to related companies, financed by financial means and instruments, such as debentures, private loans, cash advances and bank loans. Two companies are considered to be related if they fall within the scope of Section 33 of the ITL
The arm’s length principle, as set out in Article 9 of the OECD Model Tax Convention on Income and on Capital, is the international standard adopted by OECD member states used in determining the transfer prices between related undertakings conducting cross-border transactions. To ensure the application of this principle, the OECD has developed regularly updated guidelines to be observed both by multinational enterprises and by tax administrations in the scope of transfer pricing between related entities conducting cross border transactions.
In the national law, the arm’s length principle is reflected in Section 33 of the ITL which allows adjusting the reported profits as described therein in case the transfer prices differ from prices that would have been agreed between independent entities.
This Circular applies with effect as from 1st July 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 1st July 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 provisions of this circular which will be verified by the Tax Commissioner. All tax ruling requests, irrespectively of the date they have been submitted, must comply with the 2015/13 and 2016/13 Circulars issued by the Tax Department.