On Thursday, 30 June 2022 the Cyprus
Parliament passed a law introducing detailed
transfer pricing legislation, marking a new era in company
taxation, with effect from 1 January 2022. The OECD Transfer
Pricing Guidelines have been legislatively incorporated in Cyprus.
This short article serves as an overview of the relevant highlights
of the law.
On 30 June 2022, Cyprus’s parliament enacted for the first
time detailed transfer pricing legislation and incorporated the
OECD Transfer Pricing Guidelines for Multinational Enterprises and
Tax Administrations (OECD TP Guidelines) into the Cypriot Income
Tax Law of 2002.
pricing is the way tax law allocates
income to related companies and permanent establishments.
Cyprus is one of the last countries in the EU to implement transfer
pricing rules. Before the enactment of this law, the legal basis to
address transfer pricing issues rested on the arm’s length principle (ALP), as found in
section 33 of the ITL. Section 33 is identical to Article 9 of the
OECD Model Tax Convention and was incorporated into the Cypriot ITL
in 2002. For almost 20 years, Cypriot ITL provided no guidance as
to how to apply the ALP in practice, creating some uncertainty in
the market and limited options for obtaining a binding ruling.
2. Applicability of new law
According to the Cypriot legislation, the new transfer pricing
rules apply to transactions between related parties (legal persons
and individuals). For legal entities, the new law provides detailed
rules as to the meaning of the term “related parties” in
an effort to capture different relations that there is a
“control” situation. The main rule of the law is that
when one legal entity participates in the share capital of another
legal entity through the direct or indirect holding of share of at
least 25 per cent, the two parties are considered related
3. What you are required to do?
The law provides for two types of requirements for tax residents
in Cyprus. The first one is to submit a summary information table
which includes intercompany transactions, general information about
the group, the profile of the business and the transfer pricing
method used. The second requirement is to prepare a transfer
pricing study to justify compliance with the arm’s length
principle subject to a small size exemption. The small size
exemption applies when the controlled transactions cumulatively,
per category, do not exceed € 750,000 per tax year.
4. Transfer Pricing study
A key requirement of the law is to prepare a transfer pricing
study. As the law explicitly incorporates the OECD Guidelines, any
transfer pricing study has to cross-reference the OECD Guidelines,
which currently are more than 700 pages long and updated
The OECD Guidelines in 2017 have been heavily amended as a
result of the Base Erosion and Profit Shifting (BEPS) project. The
OECD Guidelines articulate a nine-step process for undertaking a
transfer pricing analysis. Key elements of an OECD transfer pricing
- Accurate delineation of the transaction (industry analysis and
value chain analysis);
- Recognition of the transaction;
- Comparability analysis and functional analysis;
- Finding comparables;
- Selection of the most appropriate transfer pricing method.
Transfer pricing methods of the OECD TP Guidelines are: the
comparable uncontrolled price method; the resale price method; the
cost-plus method; the profit split method; and the transactional
net margin method.
- Comparability adjustments;
- Arms-length range;
- Special rules in intangibles, risks allocation, profit splits
and financial transactions.
The Transfer Pricing Study and the summary information table for
a particular year should be prepared no later than the due date for
submitting the taxpayer’s Income Tax Return for that year.
6. Advance Pricing Agreements
The new law provides specific provisions regarding Advance Pricing Agreements based on the
7. What happens if a transfer pricing study is not performed at
all or correctly?
- damage to reputation;
- potential unfunded corporate tax liabilities;
- potential VAT liabilities;
- increased scrutiny audits from tax authorities;
The new law provides specific penalty provisions. In the event
of late submission of the summary information table a five hundred
euros (€500) fine is imposed. Further, in case the
documentation is not made available to the Tax Commissioner within
60 days from the notification of a request, a fine of five thousand
euros (€5,000) is imposed, and if it is not made available
from the sixty-first (61st) day until the ninetieth (90th) day a
fine of ten thousand euros (€10,000) is imposed, while if it
is not made available at all or made available after the ninetieth
(90th ) day a fine equal to twenty thousand euros (€20,000) is
Overall, a few conclusions can be reached:
(a) The Cyprus’ Parliament passed a law introducing detailed
transfer pricing legislation in Cyprus effective from 1 January
(b) The law explicitly incorporates the OECD Guidelines as a
(c) Specific transfer pricing documentation is
required subject to a small size exemption.
(d) Significant penalties provisions exists for
(e) As the law explicitly incorporates the OECD Guidelines, any
transfer pricing study has to cross-reference the OECD Guidelines.
This requires highly specialized transfer pricing people.
Cyprus is an independent tax boutique firm in Cyprus,
practicing exclusively in Cypriot and international tax. Our
specializations are: Financial Services, M&A Tax, Private
Client services, indirect tax, compensation tax, real estate tax,
energy tax, Tax Disputes, TP & Business Restructuring.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.