Controlled transactions and TP in Cyprus: what businesses need to know?

Cyprus has been one of the most popular jurisdictions for doing business for several years. This trend is due to a number of factors, including the corporate tax rate of 12.5%, which is among the lowest in Europe, Cyprus’s status as an EU member, a favorable IP-box regime, a wide network of double taxation treaties concluded with the participation of the Republic of Cyprus, etc.

At the same time, in order to comply with the international BEPS (Base Erosion and Profit Shifting) standards and OECD recommendations, on July 1, 2017, the transfer pricing institution (TPI) was officially implemented in Cyprus by amending the Income Tax Law (Income Tax Law, N118(I)/2002). Since 2022, the requirements of the TPA have been expanded and a reporting obligation has been established for local companies in Cyprus, as well as the rules for determining prices for goods, services and financial transactions have been clarified in order to avoid artificially understating the profits of Cypriot legal entities and their tax evasion.

In this article, we will review the main requirements for controlled transactions in Cyprus, penalties for failure to submit TP reports, and provide our own recommendations for conducting business by Cypriot companies under the regulation of the transfer pricing institution in Cyprus.

Impact of transfer pricing requirements on Cypriot companies

In general, transfer pricing requirements in Cyprus require that a Cypriot company that carries out controlled transactions with related parties (both terms will be discussed below) must set prices for its goods, services or financial transactions in accordance with market conditions (the “arm’s length” principle). If prices are set incorrectly (for example, understated or overstated), the Cyprus tax authorities may adjust the company’s profit, which may result in additional taxes.

In addition, if controlled transactions are carried out by Cypriot companies, the latter must submit transfer pricing documentation for the reporting period (financial year). Failure to comply with this requirement will result in the imposition of penalties on the legal entity in Cyprus.

Who is considered a “related party” under Cypriot law?

“Related parties” means:

1. legal entities (non-legal entities (e.g. LP)): if two companies are owned by 25% or more (or have the right to 25% or more of the company’s income) directly or indirectly by the same individual or persons related to him/her: the other spouse, relatives of the other spouse, parents, children, including the parents and children of the other spouse and other relatives, up to the third degree of kinship);

For example, if a Cypriot company owned by an individual shareholder with a stake of 25% or more has entered into an agreement with the UK company in which the same shareholder owns a stake of 25% or more (or his spouse or other relative according to the list above) – in this case, the UK company will be recognized as related to the Cypriot company.

2. individuals: the second spouse, relatives of the second spouse, parents, children, including the parents and children of the second spouse and other relatives, up to and including the third degree of kinship);

For example, if a Cypriot company owned by an individual shareholder of 25% or more has entered into a contract with the same shareholder (under which the same shareholder (his relative) is the other party to the contract), in this case such an individual will be considered related to the Cypriot company.

3. legal entities (non-legal entities (e.g. LP)) in which a group of persons collectively owns a 25% stake (or is entitled to 25% or more of the company’s income) and/or their relatives (the other spouse, relatives of the other spouse, parents, children, including the parents and children of the other spouse and other relatives, up to the third degree of kinship).

For example, if a Cypriot company owned by an individual shareholder in the amount of 25% or more, during the reporting period (for example, 2022) carried out transactions with the UK company, the shares of which are owned by the parents of the shareholder of the Cypriot company (the mother owns 10%, the father – 15%), respectively, such a transaction falls under transfer pricing, since the total amount of ownership of the parents in the UK company is 25%, and therefore it is determined by a person related to the Cypriot company.

What are “controlled transactions” under Cypriot law?

It is worth noting that the concept of “controlled transactions” for the purposes of transfer pricing reporting by Cypriot companies is not exhaustive. In particular, “controlled transactions” include:

• Purchase and sale of goods and services;
• Transactions related to royalties or similar services;
• Loans between related parties;
• Provision of supporting ancillary services;
• Other transactions not listed above.

Thus, if a Cypriot company carries out transactions that fall under the concept of “controlled” with “related” parties, the terms of such transactions must:

• correspond to market conditions, as if they were concluded between independent companies; and
• the Cypriot company must submit transfer pricing documentation.

Types of transfer pricing reporting (documentation)

1) Summary Information Table (SIT) is a document containing information on transactions between related parties, including name, tax residency, tax numbers, transaction value, determination of whether controlled transactions comply with the arm’s length principle. The obligation to file SIT reports applies to all legal entities registered in Cyprus that have carried out transactions between related parties during the reporting period (the obligation to file TP reports begins in 2022). The deadlines for filing SIT for Cypriot companies are differentiated depending on the reporting period:

– For 2022 – SIT had to be filed by February 28, 2025, however, the deadline was extended to May 31, 2025.

– For 2023 – SIT must be filed by November 30, 2025.

– For 2024 – SIT must be submitted by March 31, 2026.

 2) Local File is the specified report includes the following information: a description of the company and its activities (structure, operating model), a detailed description of the controlled transactions (types of contracts, their economic conditions), information on the transfer pricing method used (CUP, PSM, etc.) and the justification for its choice, an analysis of comparative transactions (independent transactions on the market), financial indicators and calculations confirming the compliance of the controlled transaction with market conditions. The obligation to submit a Local File applies to all Cypriot companies provided that their transactions with related parties exceed (or should have exceeded on the basis of the “arm’s length” principle) the amount of EUR 750,000 for each type of transaction for the tax year. The Local File must be prepared by the end of the financial year and provided to the tax authorities upon request within 60 days.

3) Master File is a report filed in respect of an international group of companies, describing the structure, pricing policy and financial performance of the entire group. This report must be prepared by multinational groups of companies that meet both of the following requirements: first, the consolidated revenue exceeds EUR 750 million, and second, the ultimate parent entity (UPE) or surrogate parent entity of the group is a company tax resident in Cyprus.

Penalties for failure to comply with TP reporting requirements

Please note that for failure to fulfill or untimely fulfillment of the obligation to provide transfer pricing documentation (SIT, Local File, Master File), tax legislation provides for the application of significant penalties to Cypriot companies:

• Failure to provide the Summary Information Table (SIT) within the established deadline – 500 EUR.
• If the TPR is submitted between the 60th and 91st days after the deadline – 5000 EUR.
• If the TPR is submitted between the 91st and 120th days – 10,000 EUR.
• If the TPR is submitted after the 120th day – 20,000 EUR.

Recommendations for Cypriot companies in the context of transfer pricing

Given that the issue of compliance with transfer pricing requirements is crucial for the further conduct of business by local companies in Cyprus, we recommend that regular analysis of the terms of controlled transactions be carried out at arm’s length. This means that all transactions between related parties should be carried out on market terms, as if they were concluded between independent companies.

To do this, it is necessary to use relevant transfer pricing methods (for example, the Comparative Uncontrolled Price (CUP) Method, the Cost Plus Method (CPM) Method, etc.), as well as to keep records of all financial data confirming the compliance of the transactions with market conditions. This will allow, in the event of a request from the Cyprus Tax Department, to substantiate the compliance of the controlled transaction with the arm’s length principle, which, in turn, minimizes the possibility of making tax adjustments and applying other negative consequences to the Cypriot company.

Since the issue of transfer pricing is complex, requires an analysis of the terms of contracts, ownership structure or other relationship between legal entities and individuals, as well as determining the most relevant transfer pricing method for a particular transaction, and failure to comply with the requirements for submitting TP documentation entails the imposition of penalties for businesses, we recommend seeking professional assistance from tax consultants to ensure that Cypriot companies comply with the modern requirements of TP and the tax legislation of Cyprus. Azola Legal Services lawyers will help close these issues “turnkey” by providing the necessary assistance in analyzing documents and preparing transfer pricing documentation.