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Introducing of Transfer Pricing
Withdraw of low profit margin scheme – Introducing of Transfer Pricing
Back-to-Back loans between related companies was a tax regime agreed between the Institute of Certified Public Accountants of Cyprus (ICPAC) and the Tax Commissioner in 2011.
As per the regime in order to qualify as an intra group Back-to-Back loan, the minimum acceptable net margins for tax purposes ranged between 0,35% (on loans less than €50m) and 0,125% (on loans more than €200m). This allowed funding to go through Cyprus between related parties.
On the 8th of February 2017, the Cyprus Tax Department (CTD) has informed the Institute of ICPAC of their intention to abolish the above practice of accepting pre-agreed minimum set profit margins of 0,125% - 0,35% on intra-group and related party financing arrangements that were in the form of back-to-back loans. As stated in the relevant announcement, the withdrawal of the scheme is the result of the international tax developments (OECD/G20 initiative – BEPS) as well as the review of the scheme in the context of both the Code of Ethics for the taxation of the companeis and of the State Aid perspective.
It is expected that as from the 1st of July 2017, all financing arrangements and their interest rates / profit spreads entered between related and/or connected parties should now be concluded on an arm’s length basis and will now have to be supported by Transfer Pricing Studies which were prepared by independent experts and be based on the OECD principals.
In addition from the 01st of July 2017 onwards, any tax rulings that have been issued in relation to back-to-back financing will become void and shall need to follow the new rules.
It is further expected that the CTD will issue more specific guidance on the implementation of the above, at which time we will inform you accordingly.
With the above in mind, it is strongly adviced that the clients and any other interested parties should review their current group structres and contact us for more infromation in order to assess the potential impact of the upcoming changes and to take corrective action, if required. For new transactions of this type, companies should consider having a transfer pricing study in place.
How can CosmoCo assist - Our Services
We can provide expert high level services through our experienced and dedicated team in the following areas:
- Reviewing your existing financing structures and report with suggestions on the implication of the new procedure.
- Provide assistance in the preparation of the Transfer Pricing Studies required by the new procedure.