On 12 October 2026, the Tax Department issued tax circular 5/2026 to revise the percentages applicable under the simplification rules of tax circular 6/2023. The new percentages are applicable as of tax year 2026.
The percentages have been updated as follows for each of the four types of transactions covered by tax circular 6/2023:
1. Financing transactions between related parties financed through credit facilities (circular 6/2023, Part Δ1, paragraph 14)
Existing percentage (applicable until 2025): Minimum return equal to 2.5% before tax deduction, irrespective of whether the taxpayer has the financial capacity, through its own capital, to assume the risks.
Revised percentage (applicable as of 2026): Under circular 5/2026 the resulting percentage to be applied will depend on the results of the functional analysis as follows:
A – Where the taxpayer under examination does not control the risks associated with the transactions under review and does not have the financial capacity to assume these risks, the minimum return is set at 0.5% before tax deduction.
B – In all other cases of transactions falling under paragraph 14, except for the case A described above, minimum return is set at 2% before tax deduction.
2. Financing transactions between related persons financed from own funds (circular 6/2023, Part Δ2, paragraph 18)
Existing percentage (applicable until 2025): Minimum return equal to the yield on the ten-year government bond of the country in which the lender operates, plus 3.5%, before tax deduction.
Revised percentage (applicable as of 2026): Minimum return equal to the yield on the ten-year government bond of the country in which the lender operates, plus 2.25% before tax deduction.
3. Financing transactions by related persons, to the extent that they are used in the business (circular 6/2023, Part Δ3, paragraph 25)
Existing percentage (applicable until 2025): Maximum borrowing cost equal to the yield on the ten-year government bond of the Republic of Cyprus, plus 1.5% before tax deduction.
Revised percentage (applicable as of 2026): Maximum borrowing cost equal to the yield on the ten-year government bond of the Republic of Cyprus, plus 1.75% before tax deduction.
4. Low-value-adding services (circular 6/2023, Part Δ4, paragraph 31)
The 5% mark-up on relevant expenses for low-value-adding services remains unchanged.
As a reminder, the simplification rules of tax circular 6/2023 can be applied where the taxpayer is exempt from the obligation to prepare a Local File under Article 33 paragraph 9(a) of the Income Tax Law but is nevertheless required to maintain Minimum Documentation to support compliance of related party transactions with the Arm’s Length Principle under tax circular 6/2023.
