The Cypriotic Ministry of Finance is reportedly finalizing draft legislation for the introduction of a new transfer pricing regime. The regime is to be in line with the latest OECD transfer pricing guidelines.
Cyprus, as an internationally recognised business centre, is largely an Organisation for Economic Co-operation and Development (OECD) compliant jurisdiction, as recognised in the latest OECD progress report and as such follows many of the OECD's principles and practices, including the (broadly accepted) international principle of ‘separate legal entity' (see the OECD definition of the international arm's-length principle). However, currently, the thresholds of the transfer pricing requirement and the intragroup transaction have not yet aligned with the current OECD guidelines.
Therefore, the new transfer pricing regime will concern in aligning the tax treatment of intra-group financing transactions with the international standards. It aims to put an end to the over-pricing of intra-group invoices so that any low tax rate that may apply in one country can be exploited.
In addition, in line with the latest OECD transfer pricing guidelines, the new regulation will govern the threshold of transactions that subject to transfer pricing requirement. All types of related transactions whose costs are over €750 thousand per year are subject to transfer pricing rules. In other words, a Group should document that the charges it has made for these transactions are correct and are the same as those that would be charged for transactions with third parties in order to avoid the phenomenon of transferring profits to countries with lower tax rates.
The relevant draft legislation is expected to be approved by the government this year. Currently the draft has been completed and sent to the Legal Service for review.