Guidance from Inland Revenue Cyprus on profit margins

On 27 June 2011, the Inland Revenue in Cyprus has provided guidance on the profit margins with reference to the transactions of Companies with tax residency in Cyprus related to concluding and providing loans from and to related Companies.

Related companies are companies that do not have an arm’s-length relationship (e.g., a relationship involving independent, competing interests). This could be due to both companies being part of the same business group or could stem from family or personal ties between officials of two companies.

Loans to related Cyprus companies and profit margins

The commissioner of Cyprus Inland Revenue has agreed to the following interest Margins relating to loans receivable from related companies.

a) Minimum interest margins relating to loans receivable which the commissioner of Inland Revenue can accept:
 
Loan                                               Interest margin

€                                                                   %
 

<50 M                                                          0.35

50 – 200 M                                                   0.25

>200 M                                                        0.125

b) Loans given free of interest: minimum margin of 0.35 % irrespective of the amount of loan.

For example, in case of a loan for less than 50 million euro, receivable from a company with 1 % interest is transferable to a related company, the annual interest payable by this related company cannot be less than 1.35 %.

The above mentioned margins shall have effect under the following terms:

a) The transactions relate to loans between related companies where, a company being a tax resident of Cyprus receives a specific amount through an interest or interest-free loan from a related company and then using that amount received, provides interest or interest-free loan to another related company.

b) The time frame between the date the company receives the loan and the date the company provides the loan, shall not excess 6 months.

c) In the event the loan which is received by a company is fully paid or is cancelled before the payoff of the loan which it then provides or if the opposite applies, then the transaction is beyond the application of the present rules under consideration, starting from the time the loan is fully paid or cancelled.

d) For purposes of calculating the profit margins, it shall be deducted any expenses (excluding exchange difference), which relate directly or indirectly with the transactions under consideration. In other words, the provisions under consideration are applicable to the net profit margins.

e) The profit margins under consideration shall have effect for each separate loan that the Cyprus Company, shall receive and provide. The same applies when the company receives a loan and uses the specific amount received to provide more than one loan or in the case where the Company receives more than one loan and provides merely one loan to a related company.

f) The provisions under consideration shall have effect in cases where the Company receives a loan from a third party (e.g. bank) and provides a loan to a related company which the bank has relevant guaranties from other related companies.

g) The provisions under consideration shall have also effect in the cases where instead of a loan, there being used other financing products but in such case it is requested beforehand the approval of the Registrar.”

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