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Executive summary

Following the enactment of transfer pricing legislation,¹ the Cypriot Tax Commissioner issued a notification (the Notification) with effect as of 1 January 2022, providing guidance with respect to the transfer pricing (TP) documentation requirements as introduced in Article 33 of the Income Tax Law.

Detailed discussion

The Notification provides guidance on the content, language, preparation and submission deadlines of the TP documentation files (Master and Local Files) and the Summary Information Table.

The Master and Local File content requirements are generally in line with the recommendations of the Organisation for Economic Co-operation and Development on Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD TP Guidelines).

Master File

The Notification provides that the Master File shall include the following information, that can be grouped into five categories.

• First category: organizational structure including the group structure and jurisdiction of incorporation and tax residence of each group entity
• Second category: description of the multinational enterprise (MNE) business including the following:
  • Important group business drivers
  • Supply chain for the group’s largest products/services
  • List of important service agreements between MNE group companies
  • Main geographic markets for the group’s products and services
  • Brief functional analysis for the group (e.g., key functions performed, important risks assumed, and important assets used)
  • Important business restructurings
• Third category: MNE’s intangibles
  • Description of the group’s overall strategy on intangible property development, ownership and exploitation including research and development (R&D) functions
  • List of intangibles that are important for TP purposes and their legal owner
  • List of important intragroup agreements relating to intangibles
  • A general description of the group’s TP policies related to R&D and intangibles
  • A general description of any important intragroup transfers of interests in intangibles
• Fourth category: MNE’s intercompany financial activities
  • A general description of how the group is financed
  • Identification of group’s entities that provide a central financing function for the group
  • A general description of the MNE’s general TP policies related to intragroup financing arrangements.
• Fifth category: MNE’s financial and tax positions
  • MNE’s annual consolidated financial statements (if prepared for any other purpose)
  • List and brief description of the group’s existing unilateral Advance Pricing Agreements (APAs) or other tax rulings relating to the allocation of income among countries

Local File

The Notification provides that Local File shall include the following information.

Group information

A general description of the group’s activities/operation and group’s organizational structure including the group structure and jurisdiction of incorporation and tax residence of each group entity.

Local entity

• A detailed description of the management structure of the local entity, a local organization chart, and a description of the individuals to whom local management reports and the jurisdiction(s) in which such individuals maintain their principal offices.
• Detailed description of the business and business strategy pursued by the local entity including any changes compared to the prior year
• A detailed description of any group business restructurings or intangible transfers relating or affecting the local entity, in the present or immediately past year
• List of key competitors

Controlled transactions

• Detailed description of the controlled transactions including:
  • A description of the nature of the controlled transactions (i.e., sale of goods, provision of services, financial transactions, licenses of intangibles, etc.) and the context in which such transactions take place
  • The amount of intragroup transactions for each category of controlled transactions involving the local entity (i.e., payments and receipts for products, services, royalties, interest, etc.) broken down by affiliated counterparty
• Identification of associated enterprises involved in each category of controlled transaction and the relationship among them
• Copies of intercompany agreements relating to the controlled transactions
• Analysis and documentation for each category of controlled transactions, which shall include:
  • A detailed comparability and functional analysis of the local entity and relevant associated enterprises with respect to each documented category of controlled transactions (functions performed, assets utilized and risks undertaken), including any changes compared to prior years
  • An indication of the most appropriate transfer pricing method with regard to the category of transaction and the reasons for selecting that method
  • An indication of which associated enterprise is selected as the tested party, if applicable, and an explanation of the reasons for this selection
  • A summary of the important assumptions made in applying the transfer pricing methodology
  • If relevant, an explanation of the reasons for performing a multi-year analysis
  • A list and description of selected comparable uncontrolled transactions (internal or external), if any, and information on relevant financial indicators for independent enterprises relied on in the transfer pricing analysis, including a description of the comparable search methodology and the source of such information
  • A description of any comparability adjustments performed, and an indication of whether adjustments have been made to the results of the tested party, the comparable uncontrolled transactions, or both
  • A description of the reasons for concluding that relevant transactions were priced on an arm’s length basis based on the application of the selected transfer pricing method
  • A summary of financial information used in applying the transfer pricing methodology.
  • A copy of existing unilateral and bilateral/multilateral APAs and other tax rulings to which the Cypriot Tax Authority is not a party and which are related to controlled transactions of the local entity

Financial information

• Annual audited financial statements of the local entity for the relevant accounting year
• Information and allocation schedules showing how the financial data from the financial statements of the local entity are used for the determination or the transfer pricing documentation of the controlled transactions
• Information and allocation schedules showing how the financial data of the comparables are used in applying the transfer pricing method and how it may be tied to the annual financial statements
• Analyses and explanation of use of the TP results for the purposes of determining the tax base of the local entity.

Preparation, retention and submission deadline

The Master and Local Files must be prepared by the submission deadline of the Income Tax return (e.g., currently 15 months after calendar year-end) and retained for a period equal to that of the relevant provisions regarding maintaining books and records, which is six years. The files must be provided to the tax authorities within 60 days upon request.

Language

The TP documentation files shall be available in either hardcopy or electronic format in an internationally accepted language, preferably in English. The liable taxpayer has an obligation to translate into Greek the TP documentation files within 60 days upon request.

Frequency of documentation updates

The TP documentation files can be used for subsequent years on the proviso that they are updated as required in order to reflect all necessary changes. The updated Local TP file must be updated not later than the Income Tax Return submission deadline for the respective tax year. Any changes to the original TP documentation files, including changes of market conditions compared to the prior tax year, shall be disclosed in the updated TP documentation files.

In actuality, it is quite likely that the Local TP file will have to be updated on annual basis.

Summary Information Table (SIT) content and submission method

The SIT shall be electronically submitted by the liable taxpayers on an annual basis to the tax authorities by the Income Tax Return submission deadline for the respective tax year (e.g., currently 15 months after calendar year-end).

It is noted in the Notification that the SIT should not be considered as a complete and extensive documentation. The content and format of the SIT is provided below.²

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Cyprus Limited, Limassol

• Charalambos Palaontas, Head of Transfer Pricing Services | charalambos.palaontas@cy.ey.com

• Yernar Fazylov, Transfer Pricing Services | yernar.fazylov@cy.ey.com

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Endnotes

1. See EY Global Tax Alert, Cyprus introduces transfer pricing rules and documentation requirements, dated 1 July 2022.

2. Unofficial translation of the template SIT as included in the Notification: