The Cypriot Tax Authorities (CTA) has announced their intention of withdrawing the Minimum Margin scheme (the MMS) with effect 1 July 2017. It is being reminded that in accordance with Article 33 of the Cyprus Income Tax Law, all transactions between related parties must, for tax purposes, be made on an arm’s length basis.

The MMS refers to intra-group financing arrangements falling within the ambit of the policy for obtaining and granting of loans from and to related parties as per the correspondence dated 4 July 2011 between the Tax Committee of the Institute of Certified Public Accountants (ICPAC) of Cyprus and The Commissioner of Tax of Cyprus.

The MMS was introduced in 2011 in an attempt to provide guidance as to the minimum margins (spreads) that the CTA are willing to accept for intra-group financing arrangements (back-to-back loans). The intention of the CTA is to withdraw the MMS with effect as from 1 July 2017. At the same time, the CTA plan to introduce detailed transfer pricing legislation (at least for intra-group financing activities) based on the OECD transfer pricing guidelines.

If the MMS is withdrawn during the 2017 tax year, it means that taxpayers will have to calculate the taxable margin based on two different set of rules. It is certain that a very large number of taxpayers will be affected by these changes. It is therefore recommended that taxpayers undertake a review of their existing financing arrangements and structures in order to assess the impact of the changes and timely take corrective actions in an attempt to ensure their conformity with the new framework.