In accordance with relevant notification by the Cyprus Tax Department, there will be a termination of the current tax practice in relation to the minimum acceptable margins on loans granted to related parties. This decision comes as a result of the Tax Department taking into consideration the International developments (OECD/G20 initiative – BEPS).
Based on the announcement, the existing practice with the minimum acceptable margins will apply up to 30th June 2017, and from 1st July 2017 any loan transactions between related parties should satisfy the arm’s length principle and be based on current market conditions.
It is noted that the current acceptable practices as to what was considered by the Tax Department as the minimum acceptable interest rate margin on intra group back to back loans, as supported by the circular released by the Tax Department in 2011) is as follows:
- For Amounts less than EUR 50,000,000 the acceptable margin is 0.35%
- For Amounts less between EUR 50,000,001 and EUR 200,000,000 the acceptable margin is 0.25%
- For Amounts over EUR 200,000,000 the acceptable margin is 0.15%
It worth mentioning, that currently the Tax Laws of Cyprus do not include any detailed Transfer Pricing provisions and therefore further guidance is expected on the matter either in the form of a circular or though the introduction of detailed transfer pricing provisions in the current Tax legislation.
It is however expected that as of the 1st of July 2017, all loans between Cyprus Tax Resident Companies and their related companies, will have to be supported by Transfer Pricing Studies. These will have to be prepared by independent experts and be based on the OECD principals and such guidance which will be offered by the Cyprus Tax Department.
The new procedure introduced is expected to affect a significant number of companies operating in Cyprus, as Cyprus entities have been frequently used as back to back financing vehicles. Nevertheless, with the recent tax reform and the introduction of the Notional Interest Deduction on new capital introduced, the negative taxation effects of this change may be, to an acceptable degree, controlled.
It is therefore imperative for all companies affected by the change, to thoroughly review their existing financing structures, evaluate the impact on their taxable profits and take whatever suitable corrective actions accepted by the law in order to conform to the new requirements.
We are in a position to assist you with the provision of the following services:
- Reviewing your existing financing structures and report with suggestions on the implication of the new procedure.
Provide assistance in the preparation of the Transfer Pricing Studies required by the new procedure.