1) Abolishment of minimum margins on back-to-back loans;
and alternative loan restructuring opportunity via Notional Interest Deduction
2) Notional Interest Deduction Reference Rates for 2017
3) Introducing the Totalserve Tax Team
Abolishment of minimum margins on back-to-back loans
Posted: 8 March 2017
The Cyprus Tax Department (CTD) has informed the Institute of Certified Public Accountants in Cyprus (ICPAC) of their intention to abolish the practice of accepting pre-agreed minimum set profit margins of 0,125% - 0,35% on intra-group and related party financing arrangements that were in the form of back-to-back loans.
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 CTD has the right to impose tax adjustments to make up for any deviation from the arm’s length principle (usually made in the form of a notional interest income). In the case of back-to-back loans between related parties, the CTD has, by way of practice, accepted such thin spreads / minimum profit margins without challenging the arm’s length applicability.
This current practice, which had been agreed between the CTD and ICPAC during July 2011, is expected to be abolished as from 1 July 2017. From then onwards, any tax rulings that have been issued in relation to such arrangements will become void and shall need to follow the new rules.
On the way forward, intra-group financing arrangements and their interest rates / profit spreads should be supported by a transfer pricing study, based on the relevant OECD guidelines. This will be required both for the purposes of issuing tax rulings as well as for corporate tax assessments.
The driving force behind this decision is the intention to align the Cyprus tax treatment of such arrangements with Action Points 8 – 10 (transfer pricing) of the OECD BEPS Action Plan.
Although the transfer pricing rules have not yet officially been concluded within the Cyprus tax laws, they are expected to follow the relevant OECD transfer pricing guidelines. It is further expected that the CTD will issue more specific guidance on the implementation of the above, at which time we will inform you accordingly.
With the above in mind, it is strongly recommended that such existing intra-group financing arrangements are carefully reviewed in order to assess the potential impact of the upcoming changes and to take corrective action, if required. For new transactions of this type, companies should consider having a transfer pricing study in place.
Loan restructuring opportunity:
The relatively recently introduced provision for allowing a tax benefit through a Notional Interest Deduction (NID) on new equity continues to attract great interest by international tax advisors. This provision, apart from reducing the effective tax of the Cyprus company by up to 80%, can also tackle the topical tax issue of being the ‘beneficial owner of income’, especially in the cases of loans granted by the Cyprus company. Note that in the case of loans eligible for NID, the resulting Cyprus tax charge can be as low or even lower than in the case of using thin spreads.
For example, instead of engaging the Cyprus company through a back-to-back loan arrangement, one can take advantage of the NID provisions and grant out a loan through own funds that were introduced in the share capital of the Cyprus company. New financing arrangements are prompted to consider using this method. Existing back-to-back loan arrangements are prompted to consider restructuring these by capitalizing the loans, which would entitle them to receive NID and at the same time help them achieve the beneficial owner of income test on interest received by the borrower.
You can read more about NID by clicking here.
Notional Interest Deduction Reference Rates for 2017
Posted: 3 March 2017
The Cyprus Tax Department has recently announced the official 2017 reference rates to be used for Notional Interest Deduction (NID) purposes. Specifically, Article 9B of the Income Tax Law of 2002 as amended provides for a notional interest deduction for tax purposes on new equity capital injected into Cyprus resident companies or permanent establishments of foreign companies in Cyprus as from 1 January 2015, provided the new equity funds are used for business purposes.
The reference rate relates to the 10-year government bond yield as at 31 December 2016 of the applicable country where these funds have been applied, increased by 3%; with the minimum reference rate used being the one relating to Cyprus. When applied as per the relevant provisions, the NID reference rate results in a notional interest expense that can reduce the relevant taxable profit,. More on NID can be found on our related detailed information sheet by clicking here.
The countries for which the relevant 2017 reference rates have been announced by the
Cyprus Tax Department are:
Introducing the Totalserve Tax Team
Taking this opportunity, we are pleased to introduce the senior members of the Tax Team of Totalserve Management Ltd.
Petros Rialas | Director, Head of Tax
Petros is a Fellow Chartered Certified Accountant with many years of experience in international tax planning, corporate taxation and trusts.
He graduated from the University of Manchester with a Degree in Economics and Social Studies and the City University of London with a Master’s degree in Business Systems Analysis and Design. His vocational background includes a two year employment in the audit line of service in London and five years in the tax services division of a Big Four firm in Cyprus.
Petros is a member of the Society of Trust and Estate Practitioners (STEP), the International Tax Planning Association (ITPA) and a member of the Tax Committee of the Institute of Certified Public Accountants of Cyprus (ICPAC). Furthermore, Petros is a regular speaker and contributor of articles locally as well as internationally.
Constantinos Markou | Senior Tax Consultant
Constantinos provides tax consultancy to investors exploring opportunities in cross-border tax planning and implementation via Cyprus.
He is a Fellow Chartered Certified Accountant. Furthermore, he holds an Advanced Diploma in International Taxation (ADIT) and a specialist advanced qualification in international and cross-border taxation awarded by the UK’s Chartered Institute of Taxation (CIOT).
Constantinos is a member of the Institute of Certified Public Accountants of Cyprus (ICPAC) and the Chartered Institute for Securities and Investments (CISI) in the UK. He is also a member and the secretary of the Tax and VAT committee of the Cyprus Fiduciary Association and a member of CISI’s national council in Cyprus. Furthermore, he teaches Cyprus taxation to ACCA students at a local college.
Marios Yenagrites | Senior Tax Consultant
Marios is a graduate of the London School of Economics, from which he holds an MSc degree in Accounting and Finance. He is a Fellow Chartered Accountant (FCA) and a Member of the Institute of Certified Public Accountants of Cyprus (ICPAC). He has also served as Secretary of ICPAC’s Corporate Governance, Internal Audit and Risk Management Committee.
Prior to joining Totalserve, Marios worked in the Tax departments of two Big Four accounting firms for a number of years, thereby possessing a solid background and experience in all matters relating to Cyprus taxation.
In his current position, Marios is involved in providing tax consultancy services to a wide array of clients, as well as undertaking tax planning and tax structuring projects.