Cyprus Adjusts Tax Treatment Of Intra-Group Financing Arrangements

On July 21, the Cypriot Ministry of Finance informed that the Commissioner of Taxation has issued a Circular for the tax treatment of intra-group financing arrangements. This follows constructive contact with the European Commission's Directorate General for Competition. The Circular has been drafted having regard to the provisions of the OECD transfer pricing guidelines.

Application of the Arm’s Length Principle

The Circular applies to any company carrying out group financing transactions that is a Cyprus tax resident, as well as to any company that is not a Cyprus tax resident and has a permanent establishment in Cyprus. The Circular provides for the application of the arm’s length principle and clarifies the conditions under which the agreed remuneration complies with the arm’s length principle.

A Return on Equity

In the case of companies performing functions similar to those performed by regulated financing and treasury companies, a return on equity of 10% after-tax can be currently observed in the market and can be taken as reference in calculating the arm's length remuneration for the financing and treasury functions in question. The minimum equity level of these companies shall be in line with the equity requirements set for credit institutions by the relevant EU regulations.

In cases where a group financing company pursues a purely intermediary function, the transactions are deemed to comply with the arm’s length principle if the analyzed entity receives in relation to its controlled transactions under analysis, a minimum return of 2% after-tax on assets.

Entry into Effect

These guidelines on intragroup financing arrangements come into effect as from July 1st, 2017, for all existing and future transactions, irrespective of the date of entering into the relevant transactions and irrespective of any tax rulings issued prior to the said date.

Sources: Ministry of Finance Cyprus

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