The Cyprus Tax Department on 24 November 2016 issued Circular 2016/15 clarifying the application of article 33 of the Income Tax Law. Article 33 allows the tax authorities to adjust transactions between related parties on terms which, in the opinion of the authorities, deviate from those which would apply in similar transactions between independent enterprises, onto an arm’s length basis.
Initially, article 33 only permitted an upward adjustment of the taxable profits of an enterprise to reflect an arm’s length price. The amending law, which was adopted in December 2015 and which 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 profits of the second enterprise or permanent enterprise should be reduced by a corresponding amount.
The Circular clarifies that compensating adjustments are also accepted. Under compensating adjustments, the taxpayer proposes a transfer price that is an arm’s length price, even though this price differs from the one actually charged in the transaction between the associated enterprises. In such a case, the Tax Department will accept adjustments for inclusion of the notional additional revenue and the corresponding notional cost that restate the transaction concerned onto an arm’s length basis.
