Below is a general summary of the Circular issued by the Cyprus Tax Department on back to back loan financing.
Intra-group financing transactions are defined as all activities of granting loans, advances to related entities bearing interest (or should bear interest) and funding through public debt issuance, private loans, advances, or bank loans.
Application of the arm’s length principle to intra-group financing transactions
All intra-group financing transactions must be conducted according to the arm’s length principle (ALP). In order to satisfy this condition, a comparability analysis testing the group transaction against similar transactions between unrelated entities must be prepared.
This analysis must consist of two parts:
i) Definition of the trade or financial relationship between the related parties and the conditions and important financial factors that relate to these relationships so as to determine the transaction
ii) Comparison of the important financial conditions of the transaction with the comparable transactions of independent parties.
The identification process must be transparent, systematic and verifiable.
For group companies that perform purely intermediary financing activities (grants, loans or cash advances to related parties), it is assumed that taking into account the associated risks, for simplification purposes, the transactions are according to the ALP if the company under examination receives in relation to the under examination transactions, a minimum return of 2% after tax on assets. This percentage will be examined regularly by the Tax Department based on market research.
In order to take advantage of the simplification process, companies must notify the tax department by completing the relevant part on the tax return of the relevant year.
No deviation is permitted from the minimum return specified in the first paragraph except in exceptional cases where such deviation is documented by a suitable transfer pricing study
The minimum requirements for a transfer pricing study are
- Description of determination of own funds necessary to cover risks
- Description of group and of the relationships between activities and parties that took part in the examined transactions and the rest of the group, together with a description of the value added by the companies involved in the transactions
- The exact application of the transaction analysed
- A full list of the comparable transactions analysed
- A table of rejected comparable transactions along with the reasons for the rejection
- The final list of comparable transactions chosen based on ALP applied to intercompany transactions determined with accuracy
- A general market description
- A list of all previous agreements with the examined entity which are still in place during the application submission
- Income statements for the years covered by the application
The transfer pricing analysis should be prepared by a Transfer Pricing Expert.
Issuing of tax rulings (including simplification related rulings) or pricing agreements as well as the use of the simplification measures described, whether applied based on a ruling or not, will be subject to the rules of exchange of information of the Directive regarding Administrative Cooperation (2011/16 as amended by directive 2015/2376).