A) OECD Transfer Pricing guidelines for intra-group transactions

1. Transfer pricing and arm’s length transactions
Transfer prices are the prices at which an enterprise transfers physical goods and intangible
property or provides services to associated enterprises.
“Associated enterprise” is an enterprise that satisfies the conditions of Article 9 of the OECD
Model Tax Convention. Under these conditions, two enterprises are associated if one of the
enterprises participates directly or indirectly in the management, control or capital of the
other or if the same persons participate directly or indirectly in the management, control or
capital of both enterprises.
The Arm’s length principle follows the approach of treating the members of the Multi National
Enterprise (MNE) group as operating as separate entities rather than as inseparable parts of a
single unified business.
To ensure the correct application of the separate entity approach, OECD member countries
have adopted the Arm’s length principle in order to secure the dual objectives of securing the
appropriate tax base and avoiding double taxation.
Article 33 of the Cyprus Income Tax Law 118(1)/2002 provides for similar provisions.

2. Reasons for transfer pricing study
– Growth of MNE’s presents increasingly complex taxation issues
– Increased integration of national economies and technological progress
– Separate country rules for the taxation
– Avoidance of double or multiple taxation
– Countries wish to tax the profits of a taxpayer based upon income/expenses that can
reasonably be considered to arise within their territory
– Correct evaluation of the performance of the various companies within an MNE group

3. Key parts for a transfer pricing analysis/study
There are two key aspects which must be taken into consideration in such an analysis
– The first aspect is to identify the commercial or financial relation between the
associated enterprises and the conditions and economically relevant circumstances
(Delineation of the transaction)
– The second aspect is to compare the comparable transaction between independent
enterprises (comparability analysis)
OECD Guidelines refer to various TP methods for the preparation of a TP study. These are:
– Comparable uncontrolled price method (CUP method)
– Resale price method (RPM)
– Cost plus method (CPM)
– Transactional Net Margin method (TNMM)
– Transactional profit split method (TPSM)
No one method is suitable in every possible situation. The selection of a transfer pricing
method, always aim at finding the most appropriate method for each particular case.
OECD issued in July 2017 pricing Guidelines regarding TP.

B) Transfer pricing study for Intra Group Financing Transactions (Circular

No.3 of the Cyprus Tax Department)
Circular No.3 refers to tax treatment of intra-group back to back financing arrangements.
Loans to related parties should only be out of funds borrowed
– from other related parties or
– from banks / financial institutions or
– from other third parties
It does not cover loans out of own funds.
The following should be taken into consideration in order to evaluate the intra-group financing

1. Broad analysis
– Determine if the company has intercompany loans
– Determine the independency of each entity
– Determine the contribution of each entity
– Determine the characteristics of the transaction
– Identify the commercial / financial relations between the related entities
– Describe the role of each of the entities involved in the group
– Understand the structure and the organization of the group and the impact of each
participating entity to the group

2. Functional analysis
A functional analysis is required to be carried out in order to decide whether the company
meets the minimum criteria, either
– For regulated financial institutions (10% after tax return on EQUITY or 11,43% before
tax) or
– The criteria for the simplification procedures (2% after tax return on ASSETS or 2,28%
before tax)
The simplification procedures can only be used by a group financing company which meets
the criteria for substance (i.e. it is imperative that the company must have an office / physical
presence in Cyprus).
The following minimum criteria shall be met:
– majority of the directors must be Cyprus tax residents
– all Board of directors meetings to be held in Cyprus and Board decisions also to be
taken in Cyprus
– shareholders meetings to be held in Cyprus
The functional analysis seeks to identify
– The economically significant activities of the transaction and responsibilities
– Assets used / contributed
– Risks assumed by the parties to the transactions (credit risk analysis, control over
risks, mitigation of risks)

3. Comparability analysis
A comparability analysis is required to be carried out in order to compare the intra-group
transaction with those of comparable transactions between independent parties. Such
comparability analysis is required when the company
– does not meet the minimum criteria of regulated financial institution or
– the criteria for simplification procedures or
– when the company wants to apply lower margins than the prescribed one (2% or
In comparability analysis the following have to be considered
– The comparable to be used should be as closely as possible similar to the intra-group
– Any previous agreements concluded by the entities under analysis which are still in
– A complete list of all searched potential comparable transactions
– A complete list of the rejected comparable transactions with justifications
– The most appropriate comparable transactions to be used with justification

4. Transfer pricing expert / qualified person
For the moment there is no definition about “Transfer pricing expert” and who is eligible to
prepare TP studies. The key is that such studies shall be based on the principles of
completeness and reliability of comparable parameters used and comply with the OECD
TP analysis can be prepared by:
– An experienced professional accountant / economist / financial analyst etc
– An experienced / qualified employee of the group
– An experienced / qualified member of the Board of directors of the group

The auditor of the company is required to carry out an assurance control, confirming the
quality of the TP analysis. The TP analysis will be submitted to Tax Authorities only upon

March 2018

This newsletter has been prepared as a general guide and for information purposes only. It is not a
substitution for professional advice. One must not rely on it without receiving independent advice based
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