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Frequently Asked Questions with reference to the Interpretive Circular 3 dated 30/06/2017 with title "Tax treatment of intra group back to back financing transactions", hereafter "Back to Back Circular".

The answers to the FAQs are applicable to all transactions that fall within the scope of the Back to Back Circular and relate to loan agreements concluded as at the date of the issue of the FAQs and thereof (i.e. 24/01/2022), as well as to those loan agreements which were concluded prior to that date and have not been examined by the Tax Department by that date.



The TP studies will be submitted to the Tax Department upon request.

As per paragraph 29 and bullet point 4 of the Back to Back Circular, "A TP study is prepared by a TP expert"

A TP expert is someone who possesses sufficient practical experience, competence and technical knowledge to prepare a TP study in accordance with the OECD TP Guidelines, as amended and the provisions of the Cyprus Tax Legislation, as amended.

A TP expert is qualified by sufficient evidence of his/her technical expertise, training and knowledge in TP matters.

A company which opts to apply simplification measures (2% margin after tax) because it is functionally reduced as it is purely an intermediary financing entity should only prepare a functional analysis.

The Tax Department may assess the company's taxable profits on the basis of the available information and at its own discretion in the absence of a TP study.

A TP study should be prepared when an intra group loan is initiated and updated when: (i) new loans are provided or received by the company, or (ii) significant terms of the existing loans change or amended, or (iii) the functional profile of the company changes, or (iv) the market and economic conditions change significantly (if applicable).

The above list is indicative and it is not exhaustive.

Controlled transaction means transactions between related parties. Related parties are defined in paragraph 3 of article 33 of the Income Tax Law L. 118(I)/2002, as amended.

"Specialized personnel" should have sufficient knowledge, possess competence and experience to perform decision making functions and to control the risks of a controlled transaction under consideration.

The term "Control over risk" is described both in the Back to Back Circular and in the OECD Transfer Pricing Guidelines for Multinational Enterprise and Tax Administrations, as amended.

Extracts from the OECD TP Guidelines: 1.65 "Control over risk involves the first two elements of risk management defined in paragraph 1.61; that is (i) the capability to make decisions to take on, lay off, or decline a risk-bearing opportunity, together with the actual performance of that decision-making function and (ii) the capability to make decisions on whether and how to respond to the risks associated with the opportunity, together with the actual performance of that decision-making function. It is not necessary for a party to perform the day-to-day mitigation, as described in (iii) in order to have control of the risks. Such day-to-day mitigation may be outsourced, as the example in paragraph 1.63 illustrates. However, where these day-to-day mitigation activities are outsourced, control of the risk would require capability to determine the objectives of the outsourced activities, to decide to hire the provider of the risk mitigation functions, to assess whether the objectives are being adequately met, and, where necessary, to decide to adapt or terminate the contract with that provider, together with the performance of such assessment and decision-making. In accordance with this definition of control, a party requires both capability and functional performance as described above in order to exercise control over a risk […]" .

The required level of the specialization of the personnel is analogous to the functional profile of each entity.

There is no requirement for the Company to hire specialized personnel provided that the Company’s board of directors has sufficient knowledge, possess competence and experience to perform the decision making functions and to control the risks of a controlled transaction under consideration.


Yes, contributions from shareholders who are physical persons fall within the scope of the Back to Back Circular regardless of whether these are interest bearing or not.
However, contributions which are considered equity do not fall under the definition of financial means and instruments as described in paragraph 2 of the Back to Back Circular and thus do not fall within the scope of the Back to Back Circular.

There is no need to amend the terms of the loan agreements following the application of the arm's length principle or the application of the minimum 2% margin after tax under the simplification measures.

The term "company's assets" shall be interpreted as the assets relating to the intra group back to back financing transactions (i.e. loan receivables) only. Moreover, the value of the loan receivables means the principal amount of the loans receivable. Under specific facts and circumstances accrued interest could also be included in the value of the company's assets (e.g. if loan agreement includes provisions for capitalization of the interest or if as per the actual conduct of the parties accrued interest could be considered as additional financing).

Yes. Note that the Back to Back Circular covers only intra group back to back financing transactions of such companies.

The Back to Back Circular applies to both cross-border transactions and domestic transactions between related companies.







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