Advance pricing agreements for back to back group financing activities introduced in Cyprus

2011-08-30

 

Introduction

According to Section 33 of the Cyprus Income Tax laws of 2002 (ITL), the conditions in the commercial and financial relations between Cyprus companies and associated parties in the sense of this Section should meet the arm’s length standard. This means amongst others that Cypriot companies engaged in back to back group financing activities should report taxable margins on their activities that meet this standard.


Acceptable margins

The Income Tax Office in Cyprus has recently confirmed in a letter to the Institute of Certified Accountants in Cyprus that the following margins will be considered to meet the arm’s length standard of Section 33 ITL, in case of back to back group financing activities.

 Amount of the loan receivable Minimum acceptable net interest profit margin (i.e. the margin after deduction of allowable expenses)
   
 EUR %
 <50 million  0.35
 50-200 million  0.25
 200 million >  0.125
   

In case of interest-free loans, the minimum acceptable margin will be 0.35%, regardless of the amount of the loan.
The above margins will only apply to Cypriot companies that have borrowed certain amounts from associated parties in the sense of Section 33 ITL and have used such amounts to issue loans to other associated parties in the sense of this Section. The margins can in principle not be applied in cases where loans have been taken up from non-associated parties for the issue of loans to associated parties or vice versa.

Another condition is that foreign exchange results on debts and receivables in back to back group financing arrangements should be tax neutral; losses are not allowed deduction, but profits will not have to be added to taxable income.

The above margins enter into force for tax years starting on 1 January 2008 and onwards.
It should be mentioned that the above only serves as general guidance and we strongly advise clients to liaise with a tax counsel in Cyprus for the negotiation of specific rulings with the Cypriot Inland Revenue. Consulco has the expertise to assist clients in this process.