Month: December 2024

Pillar Two - Amended legislation in the Cyprus tax system

Pillar Two: EU Directive rules on 15% Minimum tax on MNE & Large Scale Domestic Groups applicable in Cyprus law

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Pillar Two: Global Minimum Tax on MNE and Large-Scale Domestic Groups – Cyprus officially transposes the EU Directive in the local law  

On 12 December 2024, the Cyprus House of Representatives approved the transposition of the EU Directive 2022/2523 in the Cyprus national law, regarding the legislation on the Global Minimum Level of Taxation for Multinational Enterprise Groups and Large-Scale Domestic Groups.

This legislation ensures the application of a minimum tax rate of 15% for these groups with annual consolidated revenues of at least €750 million. The new provisions introduce a “top-up tax” which will be imposed on the applicable parties, whenever the effective tax rate in a specific jurisdiction falls below 15%.

Below is a summary of the law’s provisions, its applicable parties, and the effective application date:

Provisions introduced Application Effective Application Date 
Qualified Income Inclusion Rule (QIIR) Applies to the results of the local Parent and its local subsidiaries Fiscal years beginning on or after January 2024  
Qualified Undertaxed Profits Rule (QUTPR)Imposes an additional top-up tax, not charged under CIT Fiscal years beginning on or after 1 January 2025 
Domestic Minimum Top-Up Tax (DMTT) Applies to constituent entities and joint venture entities located in Cyprus. It takes priority over QIIR and QUTPR. Fiscal years beginning on or after 1 January 2025 

Given the immediate implementation of the new provisions and the penalties for non-compliance, we recognize the urgency of taking swift action. Our team of experts is here to guide you through the complexities of Pillar Two regulations.

Contact us for more information. 

Author’s comment: The long-awaited increase in the minimum tax rate to 15% across the EU has eventually been implemented in the Cyprus’ local law. However, its applicability is restricted to large international groups with significant size, activity, and revenue. 

Transfer Pricing: Cyprus tax system, by Nobel Trust

Transfer Pricing: Amended Legislation in the Cyprus Tax System

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Transfer Pricing: Amended Legislation in the Cyprus Tax System

Cyprus tax resident companies engaging in intercompany transactions with related parties fall within the amended Transfer Pricing (TP) regulations which aim to ensure that transactions are conducted at arm’s length. By aligning the Cyprus tax system with the OECD Transfer Pricing Guidelines, the updated regulations establish a solid framework for managing cross-border transactions.

Therefore, if you own or operate a business in Cyprus, it is time to get familiar with the new TP laws and the several important obligations they bring, as they are effective from 1 January 2022.  

Key Definitions

  • Cyprus Tax Residents: Cyprus tax-resident entities and Permanent Establishments (PEs) of non-resident entities engaged in transactions with related parties.
  • Related Parties: Companies or individuals are deemed related if they (a) directly or indirectly hold at least 25% of the voting rights or share capital, or (b) have the right to at least 25% of the profits of a company.
  • Arm’s length principle: Pricing for goods, services, royalties, and loans between related parties must be in line with market conditions.

Reporting Obligations

Entities engaging in such transactions have an obligation to submit a Summary Information table (SIT) regardless of the value of the transactions.

SIT

  • The SIT must be filed together with the annual Income Tax Return.
  • It includes high-level details of intercompany transactions, such as the counterparties involved, categories of transactions, and their value.
  • A €500 penalty is imposed for late or non-submission of the SIT.

In addition, they are required to prepare and keep a record of the relevant TP documentation, being a Local File and Master File, in case they exceed the specified thresholds.

Thresholds

  • Any type of intercompany transaction (i.e., goods, services, intellectual property) exceeding €1.000.000 per category.
  • Financing transactions (i.e., loans) exceeding €5.000.000.

Local File

  • It must be prepared before the tax return filing deadline.
  • It includes a transfer pricing study that demonstrates compliance with the arm’s length principle.
  • It must be submitted to the Cyprus Tax Department (CTD) within 60 days upon request. The penalties for late submission vary from €5.000 to €20.000.

Master File

  • It is required for multinational enterprise groups where Cyprus acts as the Ultimate Parent Entity (UPE) or Surrogate Parent Entity (SPE), and the group meets the Country-by-Country Reporting requirements (with consolidated revenues exceeding €750 million).
  • It provides an overview of the group’s global business operations, organizational structure, and overall transfer pricing policies.
  • It must be submitted within 60 days upon request from the CTD.
  • The penalties for late submission vary from €5.000 to €20.000.

Advance Pricing Arrangement (APA)

An APA provides certainty for taxpayers regarding the application of transfer pricing rules to specific transactions. Businesses can apply for an APA with the Tax Commissioner, where it can pre-approve the TP methods used or the pricing of cross-border transactions.

  • The Tax Commissioner issues a decision within 10 months.
  • The APA is valid for a maximum of four years from the application date.

We understand that the penalties for non-compliance can be significant, therefore it is of high importance to take appropriate action in advance. Our team of experts is here to help you navigate the complexities of the transfer pricing changes. Whether you need assistance in understanding your reporting obligations or preparing the required documentation for your local entity or multinational group, we are ready to support you every step of the way.

Contact us here for more information.