Cyprus Transfer Pricing 2026: Local File and Master File Requirements

What is transfer pricing and why does it matter in Cyprus?

Transfer pricing is the set of rules that determines the price at which associated companies deal with each other, so that profit is not artificially shifted between them. Since related parties are not negotiating at genuine arm's length, tax law substitutes a market benchmark for whatever price they actually agreed. In Cyprus, this matters because the Tax Department can re-price a non-compliant transaction and tax the difference, even where no cash has changed hands.

The arm's length principle in plain terms

The arm's length principle asks a single question: would two unrelated businesses, each acting in its own interest, have agreed the same price on the same terms? If a Cyprus company lends to its parent at 1% when the market rate is 5%, or pays a sister company an inflated royalty, the reported profit does not reflect economic reality. Under Section 33 of the Income Tax Law, the Tax Department may adjust the taxable income upward to the arm's length figure, following the OECD Transfer Pricing Guidelines as the interpretive standard.

Who the rules actually catch

The rules catch any Cyprus tax-resident company, and any Cyprus permanent establishment of a foreign company, that has controlled transactions with connected persons. That includes intra-group loans, cash pooling, goods supplied between subsidiaries, management and administrative services, licence fees, and the use of intellectual property. A purely domestic Cyprus group is not exempt: the arm's length principle applies to related-party dealings whether the counterparty is in Nicosia or abroad. Whether you must prepare full documentation, however, depends on value thresholds discussed below.

What law governs transfer pricing in Cyprus?

Cyprus transfer pricing is governed primarily by Section 33 of the Income Tax Law of 2002, supplemented by detailed documentation rules introduced in 2022, guidance in Circular 6/2023, and a December 2025 amending law effective from 1 January 2026. Together these instruments transpose the OECD three-tiered documentation approach (Local File, Master File and country-by-country reporting) into Cyprus practice.

Section 33 of the Income Tax Law

Section 33 is the substantive rule. It empowers the Cyprus Tax Department to substitute an arm's length price where connected persons transact on terms that differ from those independent parties would have set, and to tax the resulting adjustment. Section 33 has applied for many years, but until 2022 it lacked a formal documentation framework. The documentation obligations (the Local File, Master File and Summary Information Table) were added by the transfer pricing legislation that took effect for tax years from 2022 onward.

Circular 6/2023 and the OECD Guidelines

Circular 6/2023 issued by the Tax Department fleshes out how the documentation regime operates in practice. It confirms that the OECD Transfer Pricing Guidelines are the reference standard for selecting methods and performing benchmarking, sets out simplification measures for taxpayers below the Local File thresholds, and introduces optional safe harbours for intra-group financing and for low value adding services. Cyprus practitioners treat Circular 6/2023 as the working manual alongside the statute.

The December 2025 amendment effective 1 January 2026

In December 2025 the House of Representatives passed an amending law that was published in the Official Gazette of the Republic of Cyprus on 31 December 2025 and applies from 1 January 2026. Its two headline changes are a significant increase in the Local File thresholds and an expanded definition of connected persons for directors and consultants. Both changes take effect for the 2026 tax year, so 2025 and earlier returns remain governed by the previous thresholds.

Who counts as a related or connected person?

Two persons are connected, and their dealings are controlled transactions, where one controls the other or both are under common control, measured principally by a 25% ownership or voting test. From 1 January 2026 the definition also reaches certain directors and consultants who dominate board decisions.

The 25% control test

The core test looks at shareholding and voting power. Broadly, a company is connected to another where one holds directly or indirectly at least 25% of the shares, voting rights or income entitlement of the other, or where a common person or group holds at least 25% of both. Family relationships and chains of holding companies are aggregated so that indirect control is captured. If the 25% link exists, any transaction between the two is a controlled transaction that must respect the arm's length principle and be captured in the Summary Information Table.

The new 2026 rule for directors and consultants

From 1 January 2026, company directors or consultants are also treated as connected persons where they hold at least 50% of the voting rights in board decisions, whether individually or collectively. This closes a gap where an individual exercised decisive control over a company through the boardroom rather than through share ownership. Groups with powerful non-shareholding directors, or consultancy arrangements that carry board voting influence, should re-test their relationships against this rule before filing for 2026.

What are the 2026 Cyprus Local File thresholds?

From the 2026 tax year, a Cyprus Local File is required only where controlled transactions in a category exceed EUR 10 million for financial transactions, EUR 5 million for goods, and EUR 2.5 million for services, royalties, licence fees, other intangibles and all other transactions. The thresholds are tested in aggregate per category, per year, and represent a substantial increase from the pre-2026 limits.

Thresholds by transaction category

The obligation is category by category, not a single combined figure. A company may exceed the limit for financing yet remain below it for services, in which case only the financing category needs a full Local File section. Each category is aggregated across all counterparties in the year, so several smaller loans to different group members are added together and tested against the EUR 10 million financing limit.

Old versus new thresholds compared

The 2026 increase materially reduces the number of Cyprus companies caught by full documentation. The table below compares the position for the 2025 and 2026 tax years.

How to test a category against the limit

To test whether a Local File is triggered, add up the arm's length value of all controlled transactions of the same nature during the tax year, then compare the total with the category threshold. Consider each of the two directions where relevant: for example, both loans received and loans granted feed into the financing category. If any single category total exceeds its limit, a Local File covering that category is mandatory; categories below their limit are documented more lightly, as explained below.

When must a Cyprus company prepare a Master File?

Only a Cyprus tax-resident entity that is the ultimate parent entity or the surrogate parent entity of a multinational group within the scope of country-by-country reporting must prepare a Master File. In practice this means a group whose consolidated revenues exceed EUR 750 million. Ordinary Cyprus subsidiaries and mid-sized groups do not have a Master File obligation.

The EUR 750 million group revenue trigger

The EUR 750 million consolidated revenue figure aligns Cyprus with the OECD BEPS Action 13 threshold for country-by-country reporting. Groups above it operate at a scale where tax authorities expect a high-level overview of the group's global business, its intangibles, its intra-group financing and its transfer pricing policies. That overview is exactly what the Master File provides, complementing the transaction-specific detail of the Local File.

Ultimate and surrogate parent entities

The Master File duty attaches to the entity that reports for the group, namely the ultimate parent entity or, where the group nominates one, the surrogate parent entity. A Cyprus company that is merely a subsidiary within a large group does not itself prepare the Master File, although it may need to obtain a copy for its own records and to support its Local File. If your Cyprus company sits at the head of a EUR 750 million-plus group, the Master File and country-by-country reporting obligations should be planned alongside structuring a Cyprus holding company.

What is the Summary Information Table (SIT) and who files it?

The Summary Information Table (SIT) is an annual electronic return that every taxpayer with controlled transactions must submit, regardless of value and regardless of whether a Local File is required. It is filed through the Tax For All (TFA) portal and is due together with the income tax return. The SIT is therefore the one transfer pricing obligation that catches even small Cyprus groups.

What the SIT must disclose

For each controlled transaction, the SIT discloses the counterparty's name, its country of tax residence and its tax identification number, the category and value of the transaction, and the transfer pricing method applied. It is effectively a structured summary of the group's related-party dealings for the year, giving the Tax Department a risk-assessment snapshot without requiring the full Local File in every case.

The filing deadline and the Tax For All portal

The SIT is submitted electronically through the Tax For All portal and is due with the income tax return for the relevant year. Because the deadline is tied to the return, controllers should build SIT preparation into the same timetable as their corporation tax filing and their accounting and audited financial statement obligations. Missing the SIT deadline carries a fixed penalty even where every transaction is properly priced, so it should never be treated as optional. Track it alongside the 2026 Cyprus compliance and filing calendar.

What if I fall below the Local File thresholds?

If your controlled transactions fall below the Local File thresholds, you are exempt from the full Local File but must still maintain Minimum Transfer Pricing Documentation for those transactions under Circular 6/2023, and you may elect to use its simplification safe harbours. You must also still file the SIT.

Minimum Transfer Pricing Documentation

Minimum Transfer Pricing Documentation is a lighter file. It records the connected persons involved, a functional analysis at an appropriate level of detail, the transfer pricing method chosen, and a justification that the pricing is arm's length. It does not require the full benchmarking study that a Local File demands, but it must be sufficient to demonstrate compliance if the Tax Department asks. Keeping this documentation contemporaneous, rather than reconstructing it later, is the safest approach.

Simplification safe harbours under Circular 6/2023

For taxpayers below the thresholds, Circular 6/2023 offers optional safe harbours that remove the need for a bespoke benchmarking study in defined situations. Where a safe harbour applies and the taxpayer adopts the prescribed return or mark-up, the Tax Department accepts the result as arm's length. This significantly reduces cost and uncertainty for routine intra-group financing and for administrative services, as set out next.

What are the safe harbour rates for financing and services?

Circular 6/2023 provides two principal safe harbours: a minimum 2.5% after-tax return on qualifying intra-group financing funded from own means, and a minimum 5% mark-up on low value adding services. Both are optional, and adopting them shifts the compliance burden away from full benchmarking.

2.5% after-tax return on intra-group loans

For back-to-back and own-funded intra-group financing that meets the conditions, the safe harbour treats a minimum 2.5% after-tax return on the financed amount as arm's length. A Cyprus finance company that adopts the safe harbour avoids preparing a separate benchmarking study for that activity, provided it has adequate substance and control over the risks. The financing safe harbour interacts closely with the notional interest deduction on intra-group financing, so the two should be modelled together to avoid double counting the benefit.

5% mark-up on low value adding services

For low value adding services (typically routine administrative, support and back-office functions that do not involve valuable intangibles or significant risk), the safe harbour accepts a 5% mark-up on the relevant cost base as arm's length. This mirrors the OECD simplified approach and is widely used by Cyprus service and holding companies that recharge group overheads. Where services are more than routine, the safe harbour does not apply and a full analysis is needed.

What are the deadlines and quality-review requirements?

A Local File and, where required, a Master File must already exist by the income tax return filing date, must be submitted to the Cyprus Tax Department within 60 days of a written request, and the Local File must be quality-reviewed by a suitably qualified professional before submission.

The 60-day production rule on request

The documentation is not filed automatically with the return; instead, it must be prepared contemporaneously and produced on demand. Once the Tax Department issues a written request, the taxpayer has 60 days to submit the Local File or Master File. Because 60 days is too short to build a compliant file from scratch, the practical rule is to have the documentation finalised by the return deadline and simply retrieve it when asked.

Quality assurance by a licensed professional

Before submission, the Local File must be quality-reviewed by a person holding a relevant practising certificate, in practice a licensed auditor or tax professional such as an ICPAC certificate holder. This assurance step confirms that the file meets the required standard and that the arm's length conclusion is properly supported. Building the review into the timetable, rather than treating it as an afterthought, avoids a last-minute scramble if a request arrives.

What penalties apply for non-compliance?

Non-compliance carries fixed and escalating penalties. Failure to submit the SIT on time attracts a EUR 500 penalty, while late submission of a requested Local or Master File is penalised on a sliding scale up to EUR 20,000.

SIT and documentation penalty tiers

The penalty structure is set out below.

These penalties are separate from any tax adjustment. If the Tax Department also re-prices a transaction under Section 33, additional tax, interest and further penalties on the underpaid tax can follow, so the documentation penalties are only part of the exposure.

How do transfer pricing rules interact with other Cyprus tax rules?

Transfer pricing does not operate in isolation. It intersects with the notional interest deduction, the controlled foreign company rules, DAC6 reporting and the broader substance requirements, and a defensible position on one usually depends on the others.

Notional interest deduction and financing

Intra-group financing sits at the crossroads of transfer pricing and the notional interest deduction. The arm's length return on a loan and the notional interest deduction on new equity funding both influence the effective tax outcome of a Cyprus finance structure, and they must be modelled consistently. A safe harbour return taken for transfer pricing purposes should be reconciled with the notional interest deduction claimed on the same capital.

CFC, DAC6 and substance

Related-party structures also engage the Cyprus controlled foreign company (CFC) rules, which can attribute the income of a low-taxed foreign subsidiary back to Cyprus, and DAC6 cross-border arrangement reporting, where certain intra-group arrangements are notifiable. Above all, transfer pricing outcomes must be backed by real activity: establishing genuine economic substance in Cyprus and satisfying Cyprus corporate tax residency and the management and control test are what make an arm's length allocation of profit to Cyprus credible to the Tax Department and to foreign authorities.

How to build a compliant transfer pricing file: a checklist

A workable transfer pricing process runs on a repeatable annual cycle. The steps below help group controllers stay compliant for the 2026 tax year.

Practical steps for group controllers

1. Map every controlled transaction for the year, identifying each connected person under the 25% test and the new 2026 director and consultant rule.
2. Aggregate transactions by category (financial, goods, services, royalties and other) and compare each total against the 2026 thresholds.
3. Prepare a full Local File for any category above its threshold, and Minimum Transfer Pricing Documentation for categories below it.
4. Decide whether to adopt the 2.5% financing and 5% low value adding services safe harbours, and document that choice.
5. Confirm whether the group is within country-by-country reporting scope (over EUR 750 million) and whether the Cyprus entity is the parent that must prepare a Master File.
6. Complete and file the Summary Information Table through the Tax For All portal with the income tax return.
7. Have the Local File quality-reviewed by a licensed professional and stored so it can be produced within 60 days of any request.

How Philippou Law Firm can help

Philippou Law Firm advises Cyprus companies and international groups on the full transfer pricing lifecycle, from testing controlled transactions against the 2026 thresholds to preparing Local Files, Master Files and the Summary Information Table, and applying the Circular 6/2023 safe harbours correctly. We coordinate the required quality review, align your transfer pricing with your financing, substance and residency position, and represent you in dealings with the Cyprus Tax Department. Contact us to review your 2026 obligations before your filing deadline.