Circular 2016/15, issued on 24 November 2016, by the Cyprus Tax Department, defines the application of Article 33 of the Income Tax Law (118(I)/2002), as amended in 2015 (187(I)/2015). Article 33 enables the tax authorities to adjust and regulate transactions between related parties on terms which, according to the authorities, differ from those which would apply to similar transactions between independent enterprises, onto an arm’s length basis.
Previously, Article 33 authorised the tax authorities to intervene and make an upward adjustment of the taxable profits of an enterprise in order to tax enterprise’s revenues that should have accumulated on arm’s length basis. Specifically, Article 33 enabled the tax authorities to intervene and challenge transactions between related parties given that such transactions were not carried out at ongoing market prices and on fair commercial terms, thereby increasing the revenue of the particular transaction.
The amending law, which was adopted in December 2015 and is effective for the 2015 tax year and subsequent years, provides that if the taxable profits of a resident enterprise or of a permanent establishment of a non-resident enterprise are increased to adjust a transaction with another resident enterprise or permanent establishment of a non-resident enterprise onto an arm’s length basis, the taxable revenue of the other enterprise or permanent enterprise should be reduced by a corresponding amount.
Furthermore, the Circular confirms that compensating adjustments are also accepted. Under compensating adjustments, the taxpayer suggests a transfer price that is an arm’s length price, despite the fact that this price is different from the one charged in the transaction between the related parties. In those cases, the Tax Department will accept adjustments for inclusion of the notional additional revenue and the corresponding notional expense that restate the transaction concerned on an arm’s length basis.
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