Through a circular issued on 7 July 2023, the Cyprus Tax Department (TD) clarified the method it considers as the most appropriate for determining the arm’s length pricing for financing transactions, including those of a “back-to-back” nature.
In line with the OECD TP Guidelines, the TD considers the Comparable Uncontrolled Price (CUP) method as the most appropriate Transfer Pricing (TP) method for financing transactions. Application of that method requires use of interest rates as comparables.
The circular also notes that the CUP method, is applicable to any taxpayer which:
- engages in back-to-back financing provided that the transactions are accurately delineated as loans; and
- in accordance with the conclusions of the functional and risk analysis (functions, assets and risks assumed), is characterised as a financing business which has the operational and financial capacity to assume the risks involved. The taxpayer must also be able to exercise control over the relevant risks and should have sufficient own funds to absorb potential losses in case any of the risks related with the financing transactions materialize.
It is stressed in the circular that the use of any other method by taxpayers which meet the above provisions will only be permitted in exceptional cases. Such use will need to be approved in advance by the Tax Department via the tax ruling process. The following information should be provided to the Tax Department:
- The reasons why the CUP method is less suitable or cannot be applied under the specific circumstances. To support this argument, taxpayers will need to undertake and present the results of a comparability analysis for interest rates.
- Detailed analysis supporting the position that the proposed alternative method is in line with and generates results which satisfy the arm's length principle, as defined in the OECD TP Guidelines.
- The reasons why the alternative method is considered to be a better solution than the CUP method.