Cyprus Tax Department has announced that as from 1st July 2017 all related Company transactions, including B2B (Back-To-Back) loans, where Cyprus Tax Resident Companies are involved, should follow the arm’s length principle. The Cyprus Tax Authorities decided to change the current tax regime in relation to the B2B Loans with intention to fully comply with the OECD BEPS framework.
In addition, the announcement indicates that independent Transfer Pricing Study (TPS) should be provided as supporting document evidencing that the interest rate used in the particular transaction will be considered as correct having based on the market’s conditions existed at the time the transaction took place. Information such as accounting records and taxable profits should be satisfactorily provided. Therefore, the TPS will be an essential part of the client’s strategic tax risk management.
As per the new Circular dd 30/06/2017 the minimum acceptable net profit margin must be at 2% (after deducting the relevant expenses and exchange differences).
EXAMPLE: If one company receives a loan with 3% interest rate p.a, it must grant this loan to other parties for at least 5% pa, thus the profit margin comes to 2%.
We remain at your disposal for any further information/clarifications you may require as to the above.