Monday, 24 April 2017

Cyprus: Tax authorities intend to terminate regime relating to intragroup financing arrangements

On 8 February 2017, the Cyprus Tax Department (CTD) informed the Institute of Certified Public Accountants of Cyprus (ICPAC) that it intends to terminate the use of the pre-agreed minimum profit margin regime for intragroup back-to-back financing arrangements, with effect from 1 July 2017.
The regime has been used for a number of years to provide guidance to taxpayers on the minimum margins the CTD is prepared to accept for intragroup financing arrangements to be considered to be on arm’s length terms. Financing margins ranging from 0.125% to 0.35% generally have been accepted.
According to a letter sent by the CTD to the ICPAC, all tax rulings confirming the applicability of the profit margins on intragroup back-to-back financing arrangements will cease to be effective as from 1 July 2017; instead, acceptable taxable profit margins on such arrangements will be determined under the transfer pricing rules.
Although the transfer pricing rules have not yet been finalized by the CTD, they are expected to follow the OECD guidelines and generally to require taxpayers to support the applicable profit margins with a transfer pricing study prepared by an independent expert.
The CTD’s decision to withdraw the scheme arises from recent developments relating to the EU Code of Conduct for business taxation and the OECD BEPS initiative.
Potentially affected taxpayers should review existing intragroup financing arrangements to determine whether any action is needed; financing arrangements entered into after 30 June 2017 will need to follow the arm’s length principle, with the interest rate based on market conditions, and will need to be supported by a transfer pricing study.

Source: Deloitte