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2024 Transfer Pricing Trends: Key Developments and Strategic Insights

Updated: Mar 11

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Transfer Pricing Trends and Developments

Cyprus has always been a preferred island for international businesses and individuals due to its lovely coastline, favorable judicial system, and alluring tax package. With the recent addition of transfer pricing (TP) restrictions to its legal framework, Cyprus advanced its tax regime toward compliance with the Organization for Economic Co-operation and Development (OECD). This is a significant accomplishment for the island since it indicates that it can effectively manage and strike a balance between a favorable tax environment and other demands.

On 30 July 2022, Cyprus’ Parliament voted for the introduction of the TP regulations in Cyprus to enhance this certainty. The new regulations are effective from 1 January 2022 and are aligned with OECD standards. In particular, the regulations go hand in hand with what the OECD provides in its TP Guidelines, and Base Erosion and Profit Shifting (BEPS) Actions 8–10 and 13.

The arm's length principle was incorporated into Section 33 of the Cyprus Income Tax Law, which marked the beginning of the necessity for a strong TP legal framework in Cyprus. This came about as a result of the tax authorities publishing a circular on back-to-back financing arrangements, which required Cyprus-based businesses involved in such arrangements to provide a TP analysis to justify earned margins. There was a lot of uncertainty in this area because to the absence of pertinent legislation and guidelines for the use and application of TP.

With the introduction of the TP regulations, TP experts now have a clear understanding of taxpayers’ obligations in Cyprus, and no longer lag behind other countries in this regard.

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Associated Enterprises

Transfer Pricing obligations and/or the need for compliance arises when, regardless of the nature of the transactions, the transactions in place are between related parties.

The revised Section 33(3) of the Cyprus Income Tax Law provides the following definition for associated enterprises.

A company is connected with another company where:

  • a person and persons connected with that person hold, directly or indirectly, a participation in at least 25% of the voting rights or share capital or have the right to a share of at least 25% of the income of both companies; or

  • a group of two or more persons holds, directly or indirectly, a participation in at least 25% of the voting rights or share capital or have a right to a share of at least 25% of the income of each company and the group either consists of the same persons or could be regarded as consisting of the same persons by treating a member of either group as replaced by a person with whom they are connected.

A company is connected with another person where:

  • that person and persons connected with that person hold, directly or indirectly, a participation in at least 25% of the voting rights or share capital or have a right in at least 25% of the income of that company; or

  • a group of two or more persons acts together with the intention of securing, directly or indirectly, at least 25% of the voting rights or share capital or right to a share of at least 25% of the income of a company.

The Arm’s Length Principle

The arm's length principle is the foundation of TP in both theory and practice. According to this, the terms and conditions of a transaction between two connected parties must match those of a comparable transaction between unconnected parties that takes place in the free market under similar circumstances. The foundation of the existing TP regulations is the arm's length principle.

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New TP Regulations

The new TP regulations in Cyprus provide guidance on the application of the arm’s length principle in practice. In short, the regulations require taxpayers to document the following.

A summary information table (SIT), which must be completed and submitted electronically by all taxpayers by the same deadline as for the TD4. The SIT includes information on related parties with which the company transacts, and the nature and value of the transactions. The nature of the transactions is divided into categories including:

  • goods;

  • services;

  • intellectual property and intangibles; and

  • financial transactions and other transactions.

  • A local file, where the materiality threshold of EUR750,000 per category of transactions is met between related party transactions.

  • A master file, where the consolidated revenues of the group exceed EUR750 million.

This is in accordance with the guidance of OECD materials.

According to the law, a documentation file must be maintained on intra-group transactions performed between:

  • companies that are residents in the Republic of Cyprus; or

  • permanent establishments (PEs) of foreign companies in the Republic of Cyprus.

  • Entities with accumulated intra-group transactions per category equal to or below EUR750,000 per tax year, based on the arm’s length principle, are exempt from the obligation to maintain the Cyprus local file. Such companies are also not obliged to maintain the master file, provided they are not the ultimate parent company or surrogate parent entity as defined in the law on administrative co-operation in the field of taxation.


The local and master files must be ready up until the tax return filing deadline for the applicable tax year, and they must be made available to the tax authorities upon request. Before the taxpayer's tax return is due, a licensed auditor should also do an assurance quality assessment of the local file.

The documentation file must be updated every tax year, and the update must be completed within 12 months from the end of the tax year in which the need for the update arose. The Commissioner of Taxation has the power to determine specific issues concerning updates that are deemed necessary regarding the content of the documentation file, either on an annual or permanent basis.

A current issue faced by the tax authorities is the need for a higher threshold when it comes to financing arrangements, as both taxpayers and experts believe that the amount of EUR750,000 in aggregate is very low, resulting in the obligation on almost all payers engaged in such activities with a related party to prepare a local file.

Advance Pricing Agreements

A significant addition in the TP regulations was the option for advance pricing agreements (APAs). Cyprus taxpayers can now seek a pre-agreement with the Cyprus tax authorities for the selection of the most appropriate set of criteria in determining transfer pricing over a fixed period of time, not exceeding a period of four years.

Where the APA includes a request for consultation with the tax authorities of other states with which Cyprus has a double tax treaty in place (bilateral or multilateral APA), the taxpayer must submit such request with all supporting documents to the foreign tax authorities as well. In this case, the Commissioner of Taxation may hold consultations with the foreign tax authorities using the mutual agreement procedures (MAPs) provided in the double tax treaty concluded between the contracting states.

An exchange of position documents, which are made available to the applicant in compliance with the rules that limit and forbid the use of data found in international agreements to which the Republic of Cyprus is a party as well as in the provisions of EU law, serves as the formal means of communication between the relevant tax authorities.

The APA will be examined by the Commissioner of Taxation, who will decide whether to accept or reject it. The decision should be communicated to the taxpayer within ten months. The Commissioner can extend this period to 24 months, provided that the taxpayer is notified about the delay.

An APA can be revised, revoked or cancelled in the case of erroneous assumptions or failure of the taxpayer to comply with fundamental conditions or obligations agreed with the Commissioner of Taxation.

If these APA procedures prove to be functional, many hands will be untied and some of the decisions regarding the approach reached by the Commissioner of Taxation may serve as paradigms in the future.

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Tax Authorities’ Issuance of Frequently Asked Questions

In February 2023, the tax authorities released Frequently Asked Questions (FAQ) as the initial set of guidelines for interpreting the new TP laws. The responses mostly addressed how a taxpayer could determine the total of the applicable amounts, which category to choose for certain transactions, and other technical aspects of determining if an update to the benchmark study was necessary and whether the SIT needed to be completed.

An important point was the clarification that the threshold is based on reference to the absolute values of the controlled transactions for each category occurring in a tax year. For instance, purchases and sales need to be considered cumulatively in assessing the trigger of a local file obligation.

Additionally, the tax authorities’ FAQ explained that for intra-group loans, the TP benchmark analysis must be updated and performed again for the relevant tax year where:

  • new loans are provided or received by the company;

  • significant terms of the existing loans are changed or amended;

  • the functional profile of the company changes; or

  • the market and economic conditions change significantly.

This is similar to the previous published FAQ regarding the interpretation and application of the circular on back-to-back financing arrangements.

In fact, on 5 January 2023 the Commissioner of Taxation published a circular abolishing the circular on back-to-back financing arrangements, with effect from 1 January 2022. This raises questions on the treatment of back-to-back financing arrangements that do not meet the EUR750,000 threshold, and therefore cannot be supported by a local file, for the tax year 2022 and onwards.


The TP regulations aim to penalize taxpayers who do not disclose the local file or master file upon request from the Cyprus tax authorities in order to ensure compliance with the law. Normally, upon request, the local file and master file have to be given to the Cyprus tax authorities within sixty days. Penalties for non-compliance or late submissions range from EUR 5,000 to EUR 20,000 (for non-compliance or in cases where the documentation is not provided within 120 days of the deadline). In a similar vein, failing to turn in the SIT will result in a 500 EUR fine.

Documentation Contents

The new TP regulations also list the requirements for mandatory content of documentation. Local entities must prepare a local file, which must include:

  • the company’s management and organisational structure;

  • a general description of the activities of the group;

  • the group structure;

  • the key competitors;

  • the relevant financial information including the audited financial statements;

  • the summary schedules of the relevant financial data; and

  • an explanation of the use of the TP results to arrive at taxable income.

In addition, local file preparers must include:

  • a description of the controlled transactions;

  • copies of the intercompany agreements;

  • a detailed functional analysis with respect to each documented category of transaction;

  • the selection and application of the most appropriate TP method;

  • the conclusion of the arm’s length price;

  • any relevant adjustments; and

  • the decision of the APA or tax ruling, if any.

For the master file, the required information relates to the strategies and policies followed by the group, rather than the entity. The contents of the master file must include:

  • the group organisational structure;

  • a description of the multinational enterprise’s (MNE) business activities including the drivers of business profit;

  • the TP policies of the group; and

  • the geographic markets for the group’s products and services.

Additionally, the group’s intangibles must be listed, together with the MNE’s intercompany financial activities and tax positions.

When engaging in transactions with related parties, Cyprus taxpayers should take into account the new TP regulations and thresholds. As a result, they should conduct a pertinent analysis, set a benchmark, and determine the arm's length pricing of a controlled transaction. It is the responsibility of taxpayers to make sure they comply with Cyprus tax law and that the necessary TP documentation is in place.


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