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Cyprus Tax Alert- Profit margins relating to back-to-back loans

Profit margins relating to back-to-back loans

In accordance with a letter issued by the Cyprus Tax Department (“CTD”) to the Institute of Certified Public Accountants (“ICPAC”) of Cyprus, the guidance as to the minimum profit margins the CTD would be willing to accept in back-to-back loan transactions (“the back-to-back regime”) will be abolished as of July 1, 2017.

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Minimum profit margins to be abolished

In accordance with a letter issued by the Cyprus Tax Department (“CTD”) to the Institute of Certified Public Accountants (“ICPAC”) of Cyprus, the guidance as to the minimum profit margins the CTD would be willing to accept in back-to-back loan transactions (“the back-to-back regime”) will be abolished as of July 1, 2017. From then onwards, all related-party financing transactions will have to be supported by Transfer Pricing (TP) Studies. Such TP studies will be required both for the issuing of tax rulings and for corporate tax calculations and will be prepared by independent experts based on the relevant OECD transfer pricing guidelines.

All relevant rulings issued as at 1 July 2017 involving the back-to-back finance regime will cease to be applicable on 1 July 2017. Any back-to-back finance transactions remaining in place after 1 July 2017 will need to be supported by TP Studies for the period from 1 July 2017 onwards.

In accordance with CTD’s letter to ICPAC, the need to revise the CTD’s approach in back-to-back transactions stems from international tax developments (OECD/G20 initiative – BEPS) as well as from the meticulous review of the regime both under the Code of Conduct for Business Taxation and under an EU State Aid perspective.

It is expected that the CTD will issue further guidance on the practice to be adopted; further details will be provided upon feedback on such details.

© 2017 KPMG Limited, a Cyprus limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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