FAQ to the Circular 3 on Back-to-Back Financing Transactions – Courtesy of KPMG

On 24 January 2022, the Cyprus Tax Department published a list of frequently asked questions that clarify certain provisions the Interpretive Circular 3, dated 30 June 2017, titled “Tax treatment of intra-group back-to-back financing transactions” (Circular 3).

About Circular 3

Circular 3 applies to Cyprus tax resident companies and to permanent establishments of foreign companies carrying out intra-group back-to-back financing transactions, i.e. providing loans or cash advances to related parties that are financed through debt. The circular sets requirements to transfer pricing analysis of such transactions.

Frequently Asked Questions (FAQ)

FAQ aimed to clarify certain provision of Circular 3. In particular, the following matters are covered by FAQ:

  • The transfer pricing study for back-to-back financing arrangements should be prepared by a transfer pricing expert. Clarification on the definition of the transfer pricing expert is also included. (Questions 2 and 3).
  • A company which opts to apply the simplification measure (2% after tax margin) for the back-to-back financing arrangement is required to prepare a functional analysis. (Question 4).
  • In the absence of a transfer pricing study, the Tax Department may assess the company’s taxable profits on the basis of available information and at its own discretion. (Question 5).
  • A transfer pricing study should be prepared when an intra-group financing arrangement is initiated and updated when: (i) new loans are provided or received by the company, or (ii) significant terms of the existing loans change or amended, or (iii) the functional profile of the company changes, or (iv) the market and economic conditions change significantly (if applicable), or in other cases. (Question 6).

Full FAQ are available on the official website of the Cyprus Tax Department via the link:

Τμήμα Φορολογίας | Συνήθεις Ερωτήσεις (mof.gov.cy)

FAQ will be expanded with additional explanations at later dates.

FAQ will apply to all transactions that fall within the scope of the Circular from the publication date (i.e. 24 January 2022 for currently published questions), and also to all transactions concluded prior to the publication date that have not been examined by the Tax Department by that date.

Following the above, it is evident that companies that claimed the simplification measure should have the functional analysis prepared according to the requirements of the Circular 3, to support the application of the simplification measure.

For additional information, please reach out to members of our specialised and highly experienced transfer pricing team.