Updated Local File thresholds

On 1 February 2024, the Cyprus Tax Department (“CTD”) published a letter updating the thresholds for preparing a Local File for the tax year 2022.

Currently, in accordance with the provisions of the Income Tax Law of 2002, as amended, the requirements for preparing a Local File apply to Cypriot tax resident persons and Permanent Establishments (PEs) of non-tax resident entities that are engaged in controlled transactions, i.e., with related parties, during a tax year, provided that the cumulative amount per category, exceeds or should have exceeded based on the arm’s length principle the amount of EUR 750,000 (for all the categories of controlled transactions).

The stakeholders, including the Ministry of Finance, are in favor of increasing the threshold for the category of financial transactions for preparing a Local file to EUR 5 million. It should be noted that for loans the principal amount and accrued interest should be considered when examining whether the financial category exceeds the threshold.

In addition, the Ministry of Finance will propose increasing the threshold for all other categories of controlled transactions from EUR 750,000 to EUR 1 million.

The applicable thresholds for the tax year 2022 for preparing a Cyprus Local File will be as follows:

• Financial transactions – EUR 5 million
• All other categories – EUR 1 million

The CTD in its letter, emphasizes that persons that are exempt from the obligation to prepare a Cyprus Local File, are required to comply with the provisions of Circular 6/2023 and maintain minimum Transfer Pricing documentation for their controlled transactions, i.e., for transactions that do not exceed in aggregate the threshold per category, on an annual basis.

Should you like to further discuss the content of the legislation and potential impact to your business, please contact one of our trusted advisors from the Tax department at KPMG in Cyprus.