Profit Margins on Intra Group Loans through a Cyprus Tax Resident Company (Back-to-Back Loans)

Contributed by Aspen Trust Group. [www.aspentrust.com]

Profit Margins for Intra Group Loans

The Director of the Inland Revenue Department (IRD) has issued guidelines on the level of acceptable Profit Margin on the intra group loans:

I. Rates applicable to Interest Bearing Intra Group Loans

II. Rates applicable to Non-Interest Bearing Intra Group Loans

The minimum acceptable Profit Margin, independent of the loan amount is 0.35%.

However, for loans granted or received during the period between 2003 and 2007 the minimum acceptable profit margin is 0.3%. A group may decide to structure an intra group loan with 0%. The Cyprus Tax Resident company will need to add an amount equal to 0.35% on the back-to-back loan when calculating its taxable income. The accounting records of the company will only be affected by the tax charge.

III. Conditions for the application of rates:

1. The transactions are in connection to loans between related companies where the Cyprus Tax Resident company receives an interest bearing or a non-interest bearing loan from a related company and uses the same amount to provide an interest bearing or a non-interest bearing loan to another related company.

If any part of the loan IN payable is being used for other purposes such as an investment into another group company, only the part of the loan that has been used as a loan OUT receivable will be subject to the above rates. The interest on the part of the loan IN payable that was used for investment will be disallowed for tax purposes. Proper documentation must be maintained to support such transactions.

2. A write off of a loan IN payable or a loan OUT receivable will not create, directly or indirectly, any taxable benefit or taxable liability to the company. In the case where the company writes off the loan OUT receivable, any interest paid or payable on the loan IN payable will not be allowed for tax purposes.

3. A loan OUT receivable should be granted within 6 months from the date a loan IN payable was received. Proper documentation must be maintained to support such transactions.

4. Any back to back loans will be considered not to comply with these provisions, in the instance where the loan IN payable is fully repaid or written off before the loan OUT receivable is repaid. The same applies when the loan OUT receivable is repaid or written off before the loan IN payable is repaid. These conditions will apply as long as the loan IN payable and the loan OUT receivable run in parallel and are repaid or written off at the same time.

5. The table below provides an example of profit margins after the deduction of any costs and expenses that relate directly to the intra group loans, this can be described as the Net Profit Margins. Realised or unrealised Foreign Exchange differences that arise from these types of loans will not be allowable for tax purposes. Foreign Exchange gains will not be taxed and Foreign Exchange losses will not be allowed.

Intra Group Loan Example:

6. The rates will be applicable for individual back to back transactions only and not on an aggregate basis. This applies in the instances where the company receives a loan IN payable as one amount and gives out a number of different loans or if the company receives several loans and gives one loan out.

7. These conditions are also applicable in the instances where the Cyprus Tax Resident company borrows from a third party, for example a bank, using collateral from other group companies and lends to a related company.

8. These conditions are applicable in the instances where the company uses other financing products. However, the company needs to obtain the approval of the director of the IRD before the transaction takes place.

A Cyprus Tax Resident Company may apply for a written confirmation to the IRD for the intended Profit Margins to be used.

Previously investigated and resolved cases will not be reopened by the IRD if an objecting has not been submitted within the prescribed time to file an objection.

Our services

Our team has the necessary expertise and is in a position to offer advice on how the guidelines may affect our clients.

Furthermore, we can review existing structures, make recommendations to ensure compliance, offer advice and implement new structures in line with the new regulatory guidelines.

We look forward to being of service.

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