Abolition of Back-to-Back loan arrangements

As a result of recent developments in international taxation, particularly the introduction of measures by the OECD for the prevention of Base Erosion and Profit Shifting (BEPS) and similar measures introduced by a number of jurisdictions, the Cyprus Tax Department (“CTD”) has notified professionals that the minimum margins acceptable in the case of intra-group financing arrangements (the “Back-to-Back Arrangement”) shall no longer be applicable with effect as of 1st July 2017.

The Back-to-Back Arrangement introduced in 2011 provided that a minimum profit margin ranging between 0,125% and 0,35% per annum applied by Cyprus tax resident companies entering into intra-group financing arrangements was acceptable by the CTD for the purpose of satisfying the arm’s length principle.

Following the announcement of the CTD, as from 1st July 2017, the interest applied on intra-group financing should be based on transfer pricing studies prepared by tax experts in accordance with the OECD guidelines.

The adoption of such measures by the Cyprus government further enhances the credibility of Cyprus as a financial centre and aims to promote the establishment of more robust Cyprus corporate structures where business substance is present.

Relevant provisions and practical guidance as to the applicability of transfer pricing rules are expected to be announced in the following months. Taxpayers who have such financing arrangements in place should review their structures and take any necessary actions to conform to the new requirements.