Tax Treatment of Intra-Group Back-to-Back Financial Arrangements

July 2017

On 30 June 2017, Baker Tilly in Cyprus issued a document stating the Cypriot tax department had issued an interpretative circular relating to the revised tax treatment of intra-group back-to-back financing arrangements.


The new tax treatment is applicable for companies which meet the following criteria:

  • Carry out group financing transactions. The activities related to investment holdings are not taken into consideration
  • Cypriot tax resident companies (ie their management and control is exercised in Cyprus), or are non-Cypriot tax resident companies which have a permanent establishment in Cyprus and the financing activities are attributable to the permanent establishment.

Meaning of the term Intra-Group Financing Transaction

The term “intra-group financing transaction” refers to any activity of granting of loans or cash advances remunerated by interest (or which should be remunerated by interest) to related companies, financed by financial means and instruments, such as debentures, private loans, cash advances and bank loans. Two companies are considered to be related if they fall within the scope of Section 33 of the Cypriot Income Tax Law.

A group financing company may grant loans and other credit facilities to related companies for various commercial reasons, such as (i) financing of fixed assets, (ii) financing of current assets, (iii) long term strategic financing and (iv) other types of financing.

Application of Arm’s Length Principle to Intra-Group Financing Transactions

For the purposes of transactions falling within this circular, it is necessary to determine for each intra-group financing transaction conducted, same as with all types of intra-group transactions, whether the agreed remuneration complies with the arm's length principle. (As set out in Article 9 of the OECD Model Tax Convention on Income and on Capital). In other words, whether the intra-group financing transaction corresponds to the price which would have been accepted by independent entities in comparable circumstances, taking into account the economic nature of the transaction.

In the Cypriot tax legislation, the arm’s length principle is included in Section 33 of the Income Tax Law, which allows adjustments to the reported profits as described therein in cases where prices differ from prices that would have been agreed between independent entities.

Comparability Analysis

An appropriate comparability analysis must be carried out in order to determine whether transactions between independent entities are comparable to transactions between related entities.

The comparability analysis should consist of two parts:

  • Identification of commercial or financial relationship between related entities and determination of the conditions and economically relevant circumstances attaching to the relationship
  • Comparison of the accurately delineated conditions and economically relevant circumstances of the controlled transaction with those of comparable transactions between independent entities.

Functional Analysis

The purpose of the functional analysis is to identify the economically significant activities, responsibilities and functions, the assets used or contributed and the risks assumed by the parties in the context of the transaction.

The following functions can be performed by companies conducting intra-group financing transactions:

  • Origination of the transaction, ie (i) commercialisation of a transaction, (ii) negotiation, (iii) identification of the refinancing structure related to the financing activity and (iv) evaluation of the compliance with the contractual commitments prior to the final closing;
  • Managing the transaction, ie (i) managing the financing transaction, (ii) credit risk monitoring and (iii) managing the financing of the transaction.

Simplification Measure

When a Cypriot tax resident group finances a company that pursues intermediary activity, grants loans or advances to related companies, which are refinanced by loans or advances obtained from related companies, which are refinanced by loans or advances obtained for related companies, it is considered that, in view of the risks associated with the transactions analysed, for sake of simplification, the transactions are deemed to comply with the arm’s length principle, if the company receives in relation to its controlled transactions under analysis, a minimum after tax return of 2% on the assets. This percentage will be regularly reviewed by the tax department, based on relevant market analyses.

It should be noted, that the minimum return percentage on assets funded by purely intermediary group finance companies with reduced functions cannot be used, without a transfer pricing analysis, to determine arm's length remuneration for intra-group financing transactions different from those covered by the relevant circular.

The simplification procedures can only be used by a group financing company, which meets the criteria for substance (as described in the circular), such as an actual presence in Cyprus, which takes into account (i) the number of members of the board of directors who are tax resident of Cyprus, (ii) the number of meetings of the board of directors taking place in Cyprus and (iii) the availability of qualified personnel to control the transactions performed.

The group financing company may subcontract functions which do not have a significant impact on risk control.

In order to benefit from this simplification measure, entities should communicate to the tax department the use of the simplification procedure, by completing the relevant field in the tax return of the corresponding fiscal year.

A deviation from the minimum return of 2% is not allowed unless it is duly justified by an appropriate transfer pricing analysis.

Minimum Requirements for Transfer Pricing Analysis

The minimum requirements for the transfer pricing analysis are those that are set out in paragraph 29 of the relevant circular.

The transfer pricing analysis should be prepared by a transfer pricing expert. It must be submitted to the Cyprus tax department by a person who has licence to act as auditor of a company in Cyprus, who is required to carry an assurance control of the transfer pricing analysis.

The issuance of tax rulings (including rulings related to simplification measures) or advanced

pricing arrangements, as well as the use by a taxpayer of the simplification measures, whether applied following the issuance of a ruling or not, are subject to the exchange of information rules set under the Directive on Administrative Cooperation (Council Directive (EU) 2011/16 as amended by Council Directive Council Directive (EU) 2015/2376).

Entering into Force of the Circular

The new circular applies with effect from 1 July 2017, for existing and future transactions, irrespective of the date of entering into the relevant transactions and irrespective of any tax rulings issued prior to the said date.

Any tax rulings issued prior to 1 July 2017 on transactions within the scope of the relevant circular will no longer be valid for tax periods from 1 July 2017.

If the intra-group financing transactions effected prior to 1 July 2017 are still ongoing post the reference date and they were supported by a transfer pricing study, the said transfer pricing study will need to comply with the provisions of the relevant circular, which will be verified by the Tax Commissioner.

All tax ruling requests, irrespectively of the date they have been submitted, must comply with the Circulars Nos. 2015/13 and 2016/13 issued by the tax department, which relate to the issuing of tax rulings by the tax department.


Further information about this can be obtained by contacting Baker Tilly in Cyprus.

Neofytos Neofytou,

Valentinos Pavlides,

Savvas Klitou,