In February 2017, the tax department in Cyprus announced its plan to end the existing tax practice in regards to minimum acceptable margins on loans given to related parties.
The reason the tax department has decided to terminate the specific tax practice is that the tax system of Cyprus has to comply with the present international developments, known as OECD/G20 initiative – BEPS and the EU STATE AID.
In accordance to the recent announcement, the tax practice will remain in place till 30/6/17. Starting from the 1/7/17, all loan transactions and dealings amongst related parties must comply with the arm’s length rule. All transactions must also be based on the conditions of the market at the given time.
EXISTING TAX PRACTICE
In 2011, the Tax Department issued a letter in order to clarify what it viewed as the minimum acceptable interest margin on intra group back-to-back loans. The letter also included an outline of the criteria that financial agreements had to meet to be credited as an intra group back-to-back loan.
The minimum acceptable net margin for tax purposes concerning back-to-back loans was set as follows: