Abolishment of minimum margins on back-to-back loans.
Following notification provided to the Institute of Certified Public Accountants of Cyprus (ICPAC) by the Cyprus Tax Department (CTD) by, the existing policy on minimum profit margins back-to-back loan transactions (“the back-to-back regime”) shall be abolished by the 1st of July 2017. The decision was made so as to align Cyprus Tax treatment with the transfer pricing rules of the OCD BEPS Action Plan.
From the 1st of July 2017, all related-party financing transactions should be supported by Transfer Pricing (TP) Studies prepared by independent experts, and will required for purposes of issuing tax rulings and corporate tax calculations.
It would be therefore highly important as well as recommended for existing as well as for future intra -group financing arrangements to be reviewed in order to assess the potential impact of the upcoming changes and if necessary to take corrective actions.
Notional Interest Deduction
The Cyprus Tax Department has recently announced the official 2017 reference rates to be used for Notional Interest Deduction (NID) purposes. Specifically, Article 9B of the Income Tax Law of 2002 as amended provides for a notional interest deduction for tax purposes on new equity capital injected into Cyprus resident companies or permanent establishments of foreign companies in Cyprus as from 1st of January 2015, provided the new equity funds are used for business purposes.
The above mentioned provision allows for a tax benefit through a Notional Interest Deduction (NID) on new equity. The provision, not only reduces the effective tax of the Cyprus company by up to 80%, but it also effectively tackles the topical tax issue of being the ‘beneficial owner of income’, especially in the cases of loans granted by the Cyprus company.
The advisable and beneficial practice following the NID provisions is that instead of engaging the Cyprus company through a back-to-back loan arrangement, one can take advantage of the NID provisions and grant out a loan through own funds that were introduced in the share capital of the Cyprus company. The outcome of the above could be proven very beneficial as it could entitle Cyprus companies to receive NID and at the same time to tackle the issue of beneficial owner of income test on interest received by the borrower.