Transfer Pricing Methods The Cyprus tax authorities suggest that the methods used by taxpayers are in line with the methods specified in the OECD TP Guidelines, which are the following: • comparable uncontrolled price method (CUP); • resale price method (RPM); • cost-plus method (CPM); • transactional net margin method (TNMM); and • profit split method (PSM).

It used to be common practice in Cyprus to use the capital asset pricing model (CAPM) for fully functional financing companies. However, further to the publication of Circular 7/2023 published on 7 July 2023 by the Cyprus tax authorities, the most appropriate method to determine the arm’s length pricing for financing transactions, including those of a back-to-back nature, is the CUP method. The application of CAPM model will only be permitted in exceptional cases, upon a preapproval in the form of a ruling obtained by the Cyprus tax authorities. The Circular is effective as from the tax year 2023.

There are no special rules that apply to cost sharing/cost contribution arrangements.

Cyprus has incorporated into its new TP regulations the opportunity for advance pricing agreements (APAs) to determine, in advance of controlled transactions, an appropriate set of criteria for the selection of pricing over a fixed period of time. These criteria include: • the method that is used or will be used; • the comparable data and the relevant adjustments that might be needed; • critical assumptions as to the functional profile and the market conditions; and • any other matter that may relate to the pricing of the transactions with related parties.

As per Circular 6/2023, published by the Cyprus Tax Authorities on 6 July 2023, entities entering into cross border transactions can use the safe harbor rules, which are only applicable for entities not exceeding (or should not exceeding) the total aggregate amount of EUR 5.000.000 of related party transactions in category of financing and the aggregate amount of EUR 1.000.000 of related party transactions in the rest categories. The safe harbor rules apply on the below types of transaction: a) Provision of financing in the form of loans or cash advances 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 applicable safe harbor will be 2.5% after the deduction of allowable expenses. The minimum return of 2.5% will be applicable on the average balance of loan receivable for the relevant tax year, including the interest accrued but not paid. b) Provision of financing in the form of loans or cash advances to related parties, which are funded out of own capital. The applicable safe harbor will be the 10-year government bond of the borrower’s country plus a 3.5%. c) Receiving of financing in the form of loans or bonds or cash advances from related parties. The applicable safe harbor shall not exceed the 10-year government bond of Cyprus plus a 1.5%. d) Conducting of low value-adding services. The applicable safe harbor should be minimum 5% mark-up on the relevant costs.

Cyprus transfer pricing legislation was introduced in 2022; therefore, judicial precedent on transfer pricing in Cyprus does not yet exist. As such, UK/EU/other common law jurisdiction judicial precedent may be used.