Transfer pricing in Cyprus

1. Legal framework 

The legal framework governing transfer pricing is Section 33 of Income Tax Law which defines in detail which parties and persons are deemed to be related and/or connected based on the principal of direct and indirect control. When associated enterprises or connected persons transact with each other the conditions applied between their commercial and financial relations must not differ from the conditions that would exist, if the enterprises or persons were independent. If there is a difference in those conditions that results in lower tax profits, the tax payer must adjust its tax computation accordingly to eliminate the effect of abusive transfer pricing. 

Non-resident tax payers and foreign tax authorities that wish for a corresponding adjustment in a Cyprus company’s/person’s taxable profits as a result of a primary adjustment made abroad due to transfer pricing need to apply for a Mutual Agreement Procedure (‘MAP’) to the Inland Revenue Department (‘IRD’). The MAP will follow the European Union’s Arbitration Convention route or the Double Taxation Treaty (‘DTT’) provisions to resolve the case depending on the origin of the claim. If the MAP is successful, the IRD will opt to give a tax credit to the tax payer. 

Cyprus tax legislation does not provide for the application of secondary adjustments. A secondary adjustment is an adjustment made in addition to the primary adjustment to deal with excess cash in the hands of an enterprise after a primary adjustment takes place. For example, if a purchase price of a specific invoice is adjusted downwardly to make the transaction as if its terms were at arm’s length, then the adjustment value (invoice price vs. arm’s length price) is treated as a constructive dividend or a constructive loan or a constructive equity contribution and taxed accordingly. 

2. Application of transfer pricing 

Cyprus follows the Organization for Economic Co-operation and Development (‘OECD’) Transfer Pricing Guidelines. Any method described in the Guidelines can be used, provided it is considered the most reliable method for the particular case. Per Transfer Pricing guidelines where traditional transaction methods are equally reliable as transactional profit methods, then they must be preferred.

Traditional transaction methods: 

a. The Comparable Uncontrolled Price (‘CUP’) method: comparison of selling price/fee of the seller under question with similar transactions between unrelated parties. 

b. The resale price method: comparison of the gross margins of party purchasing goods/ services from related parties with similar businesses where the supplier/provider is unrelated. 

c. The cost plus method: comparison of the mark up over costs of a supplier of goods/services to related parties with similar businesses selling to unrelated parties. 

Transactional Profit methods: 

a. Profit split method: split of the combined profits of the related parties on the basis of an arm’s length agreement. 

b. Transactional net margin method: comparison of net profit indicators. 

3. Selection of tax payers for investigation 

Tax payers to be reviewed are selected on the basis of risk. Indication of high risk cases as specified above expect to involve transactions with: 

a. tax heavens 

b. related entities that have high tax losses 

c. companies that have tax losses for utilization in a Group Structure (between domestic cases only)

Per Cyprus tax legislation the burden of proof is on the taxpayer, who needs to provide evidential documentation to satisfy the assessor that prices used are at arm’s length and that these prices have been decided in accordance with OECD Transfer Pricing Guidelines. 

4. Penalties/Interest Transfer pricing adjustments are considered to fall within the scope of tax avoidance, unless the IRD proves there has been fraud or willful default (tax evasion). Therefore, the provisions of the law relating to tax avoidance will be applied (interest since the tax year in which the avoidance took place and penalties not exceeding 10% of the additional tax imposed).

In cases of fraud or willful default, additional penalties will be imposed, provided that the case is in agreement with the IRD (to avoid further legal action). 

5. Disagreement with IRD 

Tax payers can object the decision of the IRD in the following bodies: 

(a) Tax Tribunal 

(b) Cyprus District Courts (to appeal the decision of the Tax Tribunal) 

(c) High Court of Justice (to appeal the decision of the District Court) 

Please note that Tax Tribunal decisions are binding on the IRD.

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