Cyprus transfer pricing rules have evolved significantly in recent years. Following the expansion of the transfer pricing framework in 2022 and subsequent changes to compliance and documentation requirements between 2023 and 2024, further reforms have now been enacted as part of the Cyprus tax reform package effective from 1 January 2026.
Background
The Organisation for Economic Cooperation and Development (OECD) Model Tax Convention (MTC) forms the basis of many bilateral tax treaties, with its Commentary providing important guidance on the interpretation and application of international tax principles in cross-border arrangements.
For transfer pricing purposes, Article 9 of the MTC permits a contracting state to adjust the taxable profits of an enterprise where transactions with an associated enterprise in another state are not conducted on arm's length terms.
The arm’s length principle is best explained in Article 9:
...Conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly...
In Cyprus, this principle is reflected in Article 33(1) of the Income Tax Law, Cap. 118(I)/2002, as amended (the "Income Tax Law"), which requires transactions between related parties to be conducted on an arm's length basis.
Cyprus first introduced transfer pricing provisions for financing transactions in 2017. The transfer pricing framework was subsequently expanded through amendments to Article 33, effective from 1 January 2022, bringing all controlled transactions within scope, including financing, goods, services, intellectual property and other commercial or financial dealings.
The 2022 amendments also introduced a statutory definition of connected persons for transfer pricing purposes, generally applying where a direct or indirect participation of at least 25% exists. In addition, new compliance obligations were introduced, including the preparation and submission of a Summary Information Table (SIT) and, subject to applicable transactional value thresholds and exemptions, the preparation and maintenance of a Cyprus Local File and, where applicable, a Master File.
Further developments followed between 2023 and 2024, including the introduction of safe harbour rates and simplification measures aimed at reducing the transfer pricing compliance burden for certain taxpayers. As part of the wider Cyprus Tax Reform package effective from 1 January 2026, a number of changes have now been introduced to provide greater certainty and further streamline compliance requirements for businesses.
Files and Documentation
Master File
A Master File contains high-level information regarding the global operations, transfer pricing policies and value drivers of a multinational group. The requirement generally applies to multinational groups with consolidated revenue exceeding €750 million and is updated annually.
Local File
The Local File is a detailed transfer pricing report that documents a taxpayer's related party transactions and supports that such transactions have been conducted on arm's length terms. It typically includes information on the business, controlled transactions, functional analysis, transfer pricing methodology and benchmarking evidence.
Following guidance issued by the Cyprus Tax Department on 1 February 2024, the thresholds for preparing a Cyprus Local File were revised retrospectively from tax year 2022 and maintained until 2025.
On 1 January 2026, as part of Cyprus' broader tax reform package, significantly higher thresholds apply from tax year 2026 onwards:
| Category of controlled transaction | 2022–2025 (EUR) | From 2026 (EUR) |
|---|---|---|
| Financing transactions | 5,000,000 | 10,000,000 |
| Sale and purchase of goods | 1,000,000 | 5,000,000 |
| Services | 1,000,000 | 2,500,000 |
| Royalties and intangible assets | 1,000,000 | 2,500,000 |
| Other transaction categories | 1,000,000 | 2,500,000 |
The new thresholds do not have retrospective effect and apply only from 1 January 2026 onwards. Consequently, taxpayers assessing their 2025 obligations must continue to apply the existing €5 million and €1 million thresholds.
Simplification Measures and Safe Harbours
Simplification measures introduced under Circular 6/2023 remain relevant for taxpayers whose transactions fall below the Local File thresholds. These provisions establish minimum transfer pricing documentation requirements and provide simplified approaches for specific categories of transactions.
Minimum Documentation Requirements
Taxpayers exempt from maintaining a Cyprus Local File should retain, at a minimum:
- A brief functional analysis
- Description and characterisation of the entity
- Justification for the selected transfer pricing method
- Support demonstrating that the pricing is arm's length, including benchmarking where appropriate
These requirements continue to apply irrespective of the revised thresholds.
Safe Harbour Provisions
The Circular also provides safe harbour mechanisms for specific transaction categories, including:
| Transaction Category | Safe Harbour |
|---|---|
| Loans or advances funded through borrowings | Minimum after-tax return of 2.5% |
| Loans or advances funded out of own capital | 10-year government bond yield of borrower jurisdiction plus 3.5% |
| Related-party borrowing used in the business | Cost not exceeding Cyprus 10-year government bond yield plus 1.5% |
| Low value-adding services | 5% mark-up on relevant costs |
The safe harbour provisions must still be supported by appropriate documentation.
Summary Information Table (SIT)
The Summary Information Table (SIT) is a key transfer pricing compliance requirement in Cyprus, providing the Tax Department with a summary of a taxpayer’s-controlled transactions with connected persons. The SIT is submitted electronically through the Tax for All portal and includes details of related-party counterparties, the nature and value of controlled transactions and the transfer pricing method applied.
A key point often overlooked is that the SIT obligation is separate from the Local File obligation.
Even where a taxpayer is below the applicable Local File threshold, the SIT remains mandatory for Cyprus tax resident entities and Cyprus permanent establishments that engage in controlled transactions. There is no de minimis exemption from the SIT filing requirement.
Practical Implications
The increased thresholds provide welcome administrative relief and will significantly reduce the number of Cyprus taxpayers required to prepare a Local File. However, they do not remove transfer pricing obligations. Taxpayers must still ensure that related-party transactions comply with the arm's length principle, maintain appropriate supporting documentation and submit an SIT where controlled transactions exist.
The revised thresholds are particularly beneficial for:
- Group financing companies;
- IP holding and licensing structures;
- Service companies;
- Trading entities with moderate levels of controlled transactions.
However, taxpayers falling below the Local File thresholds should not assume that transfer pricing compliance obligations disappear. Minimum documentation requirements continue to apply under Circular 6/2023 and the Summary Information Table (SIT) remains mandatory for Cyprus tax resident entities and Cyprus permanent establishments that engage in controlled transactions.
ICONIX Comment
The increase in the Local File thresholds is a welcome simplification and will reduce the compliance burden for many Cyprus businesses. However, all controlled transactions remain subject to the arm’s length principle under Article 33 of the Income Tax Law. In practice, taxpayers must be able to demonstrate that the pricing applied is consistent with that principle. Appropriate records, agreements and transfer pricing support should therefore be maintained even where a formal Local File is not required.
How ICONIX can assist:
- Assessing whether Master File or Local File obligations arise;
- Reviewing controlled transactions for arm's length compliance;
- Preparing Transfer Pricing Files and supporting documentation;
- Advising on the application of Circular 6/2023 simplification measures;
- Preparing Summary Information Tables;
- Benchmarking financing, service and IP arrangements; and
- Reviewing transfer pricing policies in light of the 2026 reforms.