A circular on tax treatment of intra group financing has been issued by the Cyprus tax authorities on 30 June 2017


A circular on tax treatment of intra group financing has been issued by the Cyprus tax authorities on 30 June 2017.

Applicability scope
The circular applies to intra group financing arrangements (IGFAs) where loans are granted by a Cyprus tax resident company, or a Cyprus permanent establishment of a non-resident company, to a related party. The circular applies to situations where the financing is provided from debt instruments.  

Transfer pricing requirements
From 1 July 2017, IGFAs must be supported by an appropriate transfer pricing study which will determine the interest to be charged. The interest is expected to be at arm’s length i.e. at the same level that interest would be charged to an unrelated party in a comparable situation.
The relevant study must be prepared by a transfer pricing expert. The company’s auditors are required to carry out a quality control review of the transfer pricing analysis.

Simplifications measures
Simplification measures are available strictly only to entities engaged in back to back IGFAs. 
Companies and permanent establishments can opt for the simplification measures provided they satisfy the following criteria:
   a.The majority of the board of directors should be Cyprus tax residents,
   b. The majority of the board of directors meetings must be held in Cyprus and the 
       main management/commercial decisions must be taken in Cyprus,
   c. The majority of the shareholder meetings must take place in Cyprus,
   d. The financing company must have qualified personnel controlling and managing the financing transactions.
Entities which satisfied the above criteria can opt to apply a 2% after tax return margin on the funds received (borrowed) which are used in IGFAs.
A deviation from the above mentioned 2% margin is acceptable when is duly justified in a transfer pricing analysis.

Effective date, exchange of information and rulings
The new circular applies with effect as from 1 July 2017, for existing and future transactions, irrespective of the date of entering into the relevant transactions and irrespective any tax rulings issued prior to the said date.
The issuance of advanced tax rulings, as well as the simplification measures (if used) will be subject to exchange of information rules set under the Directive on Administrative cooperation.
Any rulings issued prior to 1 July 2017 on transactions relating to intragroup financing will no longer be valid for periods as from 1 July 2017.

Way forward
Cyprus companies affected by the new developments should assess the implications of the new circular on their financing structures. Our tax team is at your disposal should you require further clarifications. 

Our external tax advisors are ready to help you deal with all issues pertaining to this new rule.

Please do not hesitate to contact us for any further information at: info@consulco.com 

Consulco is an independent trust services and investment management group operating since 1993 and managed by Marios Hajiroussos, Dmitry Khenkin and Elena Hajiroussou. 

© Consulco Limited 2017. All rights reserved.No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of Consulco Limited. The information provided in this publication does not constitute legal, tax or investment advice and no responsibility is accepted for any loss occasioned directly or indirectly as a result of persons acting, or refraining from acting, wholly or partially in reliance upon it.