In recent years, Cyprus has made significant strides in aligning its tax framework with international best practices. The introduction of comprehensive Transfer Pricing (TP) documentation rules marks a pivotal shift, ushering in a new compliance era for businesses operating in or through the island.
As of 1 January 2022, these rules bring Cyprus in full alignment with the OECD Transfer Pricing Guidelines and the EU’s tax transparency agenda, reinforcing the importance of the arm’s length principle in cross-border transactions.
The Arm’s Length Principle at the Forefront
The arm’s length principle, the cornerstone of transfer pricing, requires that related-party transactions be conducted under terms that would apply between independent enterprises under similar circumstances. This principle is now more central than ever in Cyprus, with the new legislation mandating robust documentation to substantiate such pricing.
Entities engaging in transactions with related parties are expected to maintain TP documentation that demonstrates compliance with the arm’s length standard. This includes both a Master File and a Local File, depending on the size and scope of the taxpayer’s operations. The Master File provides a global overview of the group’s business, while the Local File focuses on specific intercompany transactions relevant to the Cypriot entity.
Key Compliance Requirements
Under the new rules, Cyprus tax-resident companies and permanent establishments that exceed certain thresholds must prepare and submit TP documentation.
In addition, taxpayers are now required to submit a Summary Information Table annually, disclosing details of their related-party transactions. This enables the Cyprus Tax Department to monitor intercompany dealings more effectively and detect potential risks of base erosion and profit shifting
Penalties and Audit Focus
Non-compliance with TP documentation obligations carries significant penalties, ranging from €500 to €20,000 depending on the nature and extent of the breach. More importantly, failure to maintain adequate documentation increases the risk of tax audits, adjustments, and reputational harm.
The Cyprus Tax Department has signalled a greater emphasis on TP compliance going forward, and taxpayers should expect increased scrutiny. Businesses that proactively review and align their intra-group pricing policies will be better positioned to manage risk and demonstrate transparency.
Looking Ahead
Cyprus’s adoption of formal TP documentation rules reflects a broader international shift toward greater tax transparency and accountability. Multinational enterprises operating in Cyprus must now prioritise compliance with the arm’s length principle, not only to avoid penalties but also to safeguard their global tax strategy. With enforcement on the rise, the importance of having well-prepared, contemporaneous documentation cannot be overstated. In this new compliance era, robust transfer pricing practices are not just a regulatory obligation; they are a strategic necessity.
By Stella Mourettou
SPL Audit (Cyprus) Limited
Senior Tax Manager
Email: smourettou@splcy.com