By Marios Palesis, Director, T.P. Alfa Services, Nicosia
New legislation on transfer pricing was submitted to the Cyprus parliament in June with an aim to comply with action points 8–10 of the OECD base erosion profit shifting (BEPS) plan.
The proposed legislation defines the persons obliged to maintain documentation files and report related party transactions, describes the type of information that should be maintained and reported, and creates the ability to apply for an advance pricing arrangement (APA). It also outlines the penalties for failing to submit the relevant information or submitting incomplete or late information.
Who is obliged to report related party transactions and maintain documentation
The new legislation considers parties as being related if a direct or indirect “relationship” of 25% and above can be established. A relationship exists when there is control of the voting rights or a share of capital or a right to the profits.
Such related parties must maintain a documentation file when they are involved in intragroup transactions. Also, a summary table of related party transactions must be submitted to the tax authorities no later than nine months from the end of the tax year.
To avoid placing a disproportionate burden on small and medium-size activities, the new legislation provides an exemption from maintaining the documentation file and submitting the summary table, provided that the accumulated intragroup transactions per category, based on the arm’s length principle are or should have been equal or below the amount of EUR 750,000 (USD 890,000) per tax year.
Advance pricing arrangements
The new legislation will create the opportunity for companies to apply for an APA. To be eligible to submit an APA to the tax authorities in Cyprus, companies must be resident in the republic or have a permanent establishment in the republic.
Penalties
Failure to comply with the reporting requirements entails heavy penalties, depending on the reason for such failure. The penalties vary from EUR 500 (USD 600) to EUR 20,000 (USD 24,000).
The new legislation will increase the compliance burden with respect to tax matters for Cyprus companies. It is therefore imperative to take prompt and precise actions to avoid the burden of penalties and additional tax liabilities.
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