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Tax treatment of intra group back to back loans

Tax department issued a Circular on 30th of June 2017 in relation intra-group and back-to-back financing arrangements, with effect as from 1st of July 2017. The Circular applies to Companies that carry out group financing transactions and have Cypriot Tax residency or are non-Cypriot Tax resident companies and have a permanent establishment in Cyprus and the financing activities are attributable to the permanent establishment.

The term intra group financing transaction refers to any activity consisting in the granting of loans or cash advances remunerated by interest to related parties and includes debentures, private loans, cash advances and bank loans. The application of arm’s length principle (Section 33 of the Income Tax Law) to intra group financing transactions should be considered to determine whether the transactions between independent entities are comparable to transactions between the related entities.

When a group financing company which meets the criteria and pursues a purely intermediary activity grants loans or advances to related entities which are refinanced by loans or advances granted by related entities, it is considered that the transactions are deemed to comply with the arm’s length principle if the analysed entity receives a minimum return of 2% after tax on assets. This percentage will be regularly reviewed by the Tax Department based on relevant market analysis.

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