On July 21, 2017 the Cypriot Ministry of Finance issued a press release announcing that already on July 1, 2017 the Cypriot Commissioner of Taxation has issued a Circular for the tax treatment of intra-group financing arrangements. According to the announcement this followed constructive contact with the Directorate General for Competition of the European Commission on the matter.


According to the announcement:

·   The Circular has been drafted having regard to the provisions of the OECD transfer pricing guidelines.

·   The Circular applies to any company carrying out group financing transactions that is a Cyprus tax resident, as well as to any company that is not a Cyprus tax resident and has a permanent establishment in Cyprus, as per Section 2 of the Income Tax Law 118(I)/2002.

·   Intra-group financing transaction is defined as any activity consisting of financing through loans or cash advances remunerated by interest (or should be  remunerated by interest) to related companies, or other financial means and instruments, such as debentures, private loans, cash advances and bank loans.

·   The Circular provides for the application of the arm’s length principle to intra-group financing transactions, and clarifies the conditions under which the agreed remuneration complies with the arm’s length principle, which is the remuneration that would have been agreed under comparable conditions in the open market.

·   In the case of companies performing functions similar to those performed by regulated financing and treasury companies, a return on equity of 10% after-tax can be currently observed in the market and can be taken as reference in calculating the arm's length remuneration for the financing and treasury functions in question. This percentage will be regularly reviewed by the Tax Department based on relevant market analysis. The minimum equity level of these companies shall be in line with the equity requirements set for credit institutions by the relevant EU regulations.

·   The Circular also entails simplification measures notably where a group financing company pursues a purely intermediary function. In these cases, the transactions are deemed to comply with the arm’s length principle if the analysed entity receives in relation to its controlled transactions under analysis, a minimum return of 2% after-tax on assets. A deviation from the minimum return is not allowed unless it is duly justified by an appropriate transfer pricing analysis. The Circular also sets the minimum requirements for a transfer pricing analysis.

·   The guidelines on intragroup financing arrangements come into effect as from July 1, 2017, for all existing and future transactions, irrespective of the date of entering into the relevant transactions and irrespective of any tax rulings issued prior to the said date.

·   Any tax rulings issued prior to July 1, 2017 on transactions within the scope of the circular will no longer be valid for tax periods as from July 1, 2017.

·   If the intra group financing transactions effected prior to July 1, 2017, are still ongoing post the reference date and they were supported by Transfer Pricing study, the said Transfer Pricing study will need to comply with the minimum provisions of the circular which will be verified by the Commissioner of Taxation.


Commissioner Vestager has welcomed the changes made. In a statement from Commissioner Vestager that was published on the website of the European Commission the following is stated:

I welcome that the Cypriot authorities have introduced changes to their national legislation to make it more stringent as regards the tax treatment of financing companies.


Financing companies provide financial services intra-group and their profit is the remuneration for their financing activities. This remuneration has to be in line with the arm's length principle.


This issue has been one of our key areas of focus since we started looking into the tax ruling practices of Member States. The Working Paper we published as part of this review in June 2016 indicated concerns that some tax rulings for financing companies endorse very low margins and a low taxable base.


My services have been in constructive contact with the Cypriot authorities on the issue. I welcome the changes to the Cypriot legislation, which aim to address concerns raised. They also follow similar changes introduced by Luxembourg in January 2017 to their national legislation.


These are very positive developments. In order to achieve that all companies pay their fair share of tax, we also need Member States to be on board and review their national rules and practice.


At the same time, the Commission cannot prejudge any case-by-case assessment of tax rulings under EU State aid rules and we will of course stay vigilant in monitoring the implementation of the amendments.



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