Transfer Pricing in Cyprus

The arm's length principle

Two unrelated companies negotiating a licence argue about the rate. Each wants a better outcome and neither controls the other, so the figure they settle on carries information: it reflects what the right to use the asset is worth.

Two companies under common ownership have no such argument. The same person decides both sides, and the rate can be set to put profit wherever it is most useful.

Transfer pricing rules close that gap. They require controlled transactions between associated enterprises to be priced as parties dealing at arm's length would have priced them, and they place the burden on the taxpayer to demonstrate it.

Cyprus applied the principle in general terms for years. What it now has is a formal documentation regime aligned to the OECD Transfer Pricing Guidelines, with defined obligations and thresholds rather than a general expectation.

The thresholds, and why they are per category

Three obligations sit at different levels.

The summary information table discloses controlled transactions to the tax department.

The local file is required where controlled transactions in a given category exceed the annual threshold. From 2026 those thresholds are 5 million euro for goods, 10 million euro for financing and 2.5 million euro for other categories, which includes services and intellectual property. It documents the transactions, the functions each party performs, the risks each assumes and the assets each contributes, with a benchmarking analysis supporting the price.

The master file applies where the group is above the consolidated revenue threshold and describes the group as a whole.

The per-category structure is the part most often misread. A company can be over the threshold for financing and under it for services, and the obligation is assessed category by category rather than on total intra-group turnover. Being below every threshold removes the documentation burden; it does not remove the requirement that the pricing be defensible.

Where a Cyprus structure meets it

The two transactions that most often cross a threshold are the ones a Cyprus structure is built around.

The intra-group royalty. In the two-entity model, an IP holding company licenses software to an operating company for a royalty. That is a controlled transaction in the 2.5 million euro category, and it is also the figure determining how much profit sits in the entity claiming the IP Box deduction. Two consequences attach to one number, which is why it attracts more scrutiny than any other line in the structure.

Intra-group financing. A loan between group companies carries a rate, and that rate must reflect what an unrelated lender would have charged a comparable borrower on comparable terms.

A price defensible in Cyprus can still attract an adjustment in the counterparty jurisdiction. A one-sided analysis relocates the exposure rather than resolving it, which is why the position is taken from both perspectives.