Profit Margins on Financing Arrangements

In February 2017, the Cyprus Tax Department sent a letter to the Institute of Certified Public Accountants of Cyprus (ICPAC) informing the later of its intention to abolish the minimum profit margins of 0.125% – 0.35% accepted on back to back loans, with effect from 1 July 2017.

As from 1 July 2017 all related party transactions will have to be supported by Transfer Pricing File prepared by independent experts based on the relevant OECD Transfer Pricing Guidelines. It is expected that the Cyprus Tax Department will issue further rules on the practice to be adopted.

From the above date all tax rulings in relation to back to back financing arrangements will terminate automatically and profit margins will be determined by Transfer Pricing File.

The need to revise the previous approach on back to back arrangements is generated from the latest international tax developments both in the context of the EU Code of Conduct for Business Taxation as well as the wider initiative of OECD/G20 BEPS.