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July 17, 2023

Cyprus tax authorities issue transfer pricing guidance on the pricing of 'back-to-back' financing transactions

  • On 7 July 2023, the Cypriot Tax Department issued a tax circular, effective retrospectively as of 1 January 2023, providing guidance on determining arm's-length pricing for "back-to-back" financing transactions.
  • This Alert highlights the requirements outlined in the tax circular.

Executive summary

The Cypriot Tax Department issued a circular (Circular) on 7 July 2023, with effect as of 1 January 2023, indicating that Comparable Uncontrolled Price (CUP) is the most appropriate documentation method for "back-to-back" financing transactions. Further, the Circular states that another transfer pricing method may be used only in exceptional cases and only if it is preapproved by the Cyprus Tax Commissioner via the issuance of a tax ruling.

Detailed discussion

The Circular emphasizes that from the tax year 2023 onward (i.e., from 1 January 2023), the Cyprus Tax Commissioner considers the CUP method to be the most appropriate method for determining the arm's-length price for back-to-back financing transactions, in keeping with the Organisation for Economic Co-operation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guideline). Borrowing language from the OECD Guideline, the Circular states:

The widespread existence of markets for borrowing and lending money and the frequency of such transactions between independent borrowers and lenders, coupled with the widespread availability of information and analysis of loan markets may make it easier to apply the CUP method to financial transactions than may be the case for other types of transactions.

The application of the CUP method requires the identification of comparable arm's-length interest rates and is applied to any taxpayer that:

  • Is engaged in "back-to-back" financing transactions that are categorised as "loans" following the accurate delineation in accordance with chapter I of the OECD Guidelines
  • Is characterized as a financing entity performing the relevant functions (including the control of risks) and also having the financial capacity to bear such risks (assumption of risk).

The Circular directs taxpayers to detailed information available in section C.1.2.1 of Chapter X of the OECD Guidelines.

Use of other documentation methods

Any documentation method other than the CUP for businesses that meets criteria (a) and (b), above, may be used only in exceptional cases and only if its use is preapproved by the Cyprus Tax Commissioner via the issuance of a tax ruling.

In such case, the taxpayer will need to provide the following additional information:

  • The reasons for rejecting the CUP method as the most appropriate documentation method, along with the results of a search performed under the CUP method (i.e., a comparability search) to demonstrate that there is an insufficient sample of potentially comparable data when searching for interest rates
  • A detailed analysis supporting that the selected method satisfies arm's-length principles as per the OECD Guidelines
  • The reasons why the taxpayer believes the alternative documentation pricing method is more appropriate than the CUP method


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

EY Cyprus Advisory Services Limited, Transfer Pricing Services, Limassol

Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor


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