Monday, 31 July 2017

Cyprus introduces new transfer pricing rules for intra-group financing activities

In a Circular issued by the Cyprus Tax Authorities on 30 June 2017, new transfer pricing rules have been implemented for companies carrying out intra-group financing activities. The Circular is effective immediately and replace the former Minimum Margin Scheme regime. The Circular contains requirements regarding substance, risk/equity and arm’s length compensation.

The new rules for intra-group financing companies in Cyprus are largely similar to the rules implemented in Luxembourg at the beginning of this year. 


Definition of financing activities

In the Circular, intra-group financing activities are defined as all activities with respect to granting loans to related entities, financed by (a.o.) private loans, bank loans and public debt issuance.

Arm’s length principle

Intra-group financing activities need to be conducted in line with the arm’s length principle. This implies that a comparability analysis needs to be performed to test the intra-group transaction against comparable transactions between third parties. Such a comparability analysis starts with analysing the commercial and financial relationships between the related parties, as well as the relevant economic circumstances, to accurately delineate the related-party transaction. As a second step, the terms and conditions of the controlled transaction need to be compared to those of third-party transactions.

Risk/equity requirement

The Circular states that financing companies need to bear (and manage – see below) the risks in relation to its intra-group finances basis. The equity needed to cover those risks (equity at risk) needs to be determined on a case-by-case basis in a comprehensive analysis. The Circular refers to using the solvability requirements as set out in EU regulation 575/2013 on prudential requirements for credit institutions and investment firms, in case the functional profile of the financing company is comparable to a regulated financial undertaking. If it isn’t, the equity at risk other methods such as method bases on credit rating analysis may be used.

Substance requirements

To demonstrate that the financing company actually manages the risk, it needs to have an actual presence in Cyprus. In this context, the following substance criteria are included in the Circular:
• The majority of board Directors members should be Cyprus tax residents;
• The majority of the board of Directors meetings must be held in Cyprus and the main management and commercial decisions must be made in Cyprus;
• The majority of the shareholders meetings must be held in Cyprus; and
• The financing company must have qualified personnel controlling and managing the financing transactions. 

Simplification measures

The Circular provides for two simplification rules, for purely intermediary companies and for companies having a similar profile to those of a regulated financial undertaking:
• For intra-group financing companies that act as a pure intermediary financing company and that meet the substance requirements, the Circular states an after-tax return in respect of their financing activities of 2% of the total amount of assets financed is considered to be in line with the arm’s length principle. The application of this measure needs to be disclosed in the tax return and may be subject to exchange of information.
• For intra-group financing companies with a functional profile similar to that of a regulated financial undertaking, an after-tax return on equity equal to 10% is considered at arm’s length.

Advance pricing agreement

The Circular contains detailed requirements with respect to the transfer pricing analysis in case an advance pricing agreement is requested.


The main take-away from the above is that Cyprus-based intra-group financing companies need to review their financing structures and local activities to make sure that they comply with the new Circular. Where needed, contractual arrangements relating to the allocation of risk, the equity at risk and local substance need to be amended.

How can we help

The transfer pricing team at T/A economics has ample experience in dealing with intra-group financing activities. Notably, the team has been involved in performing transfer pricing analyses for many intra-group financing companies in Luxembourg, which, as mentioned, has implemented similar rules at the beginning of 2017. 

For further details or questions, please contact:

• Frank Schwarte | Partner | +31 631 688 622 |

• Andy Neuteleers | Partner | +32 2 801 30 70 |