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Cyprus’ new rules for intra-group back-to-back financing arrangements

Cyprus’ Tax Department has issued on the 30th of June 2017 an expository Circular in relation to the update Tax Treatment of intra-group back-to-back financing arrangements, with effect as from the 1st of July 2017. The Circular applies to all existing and future transactions. Tax rulings issued before the 1st of July 2017 will no longer be valid for tax periods as from the 1st of July 2017.

The Circular is applicable to Companies that carry out group financing transactions and are Cypriot tax resident companies or are non-Cypriot tax resident companies and have a permanent establishment in Cyprus and the financing activities are attributable to the permanent establishment.
‘Intra-group financing transaction’ refers to any activity of granting of loans or cash advances remunerated by interest (or which should be remunerated by interest) to related companies, financed by financial means and instruments (debentures, private loans, cash advances, bank loans). Two companies are considered to be related if they fall within the scope of Section 33 of the Cyprus Income Tax Law.

The application of arm’s length principle (Section 33 of the Income Tax Law) to intra group financing transactions is quite significant since the latter have to correspond to the price which would have been accepted by independent entities in comparable circumstances, taking into account the economic nature of the transaction.

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