VAT on Connected Party Transactions in Cyprus

Why connected party VAT rules exist

VAT is calculated on the consideration paid for a supply — the price agreed between the supplier and the customer. For arm's length transactions this works well. For transactions between connected parties — family members, companies under common control, employer and employee — the agreed price may not reflect the true commercial value of the supply. The connected parties may agree on a low or nominal price to reduce output VAT or increase input VAT recovery in a way that does not reflect genuine commercial activity. The open market value rules prevent this.

When open market value rules apply

The Cyprus VAT open market value rules apply where the consideration for a supply between connected parties is lower than the open market value and the difference gives rise to a VAT advantage — either through reduced output VAT or enhanced input VAT recovery. If the connected party transaction is at the same price that would be agreed between independent parties no adjustment is needed. The rules target artificial pricing — not all connected party transactions.

Who counts as a connected party for Cyprus VAT purposes

• Spouses and civil partners
• Close family members — parents, children, siblings
• Companies under common control — same director, shareholder or ultimate beneficial owner
• Employer and employee for supplies between them
• Business partners
• A person and a company they control
• Companies that are members of the same VAT group

What is open market value for VAT?

Open market value for VAT is the amount that would be paid for the same or similar supply between independent parties at arm's length. For property it is typically the surveyed market value. For services it is the price charged to unconnected third-party customers for comparable services. For goods it is the price at which similar goods are sold to unrelated parties. The burden of establishing open market value rests with the business if the Tax Department questions a below-market connected party price.

Connected party transactions in VAT groups

Where connected parties are members of the same VAT group their intra-group transactions are disregarded for VAT purposes — no VAT is charged at all. The open market value rules do not apply to intra-group transactions because there is no supply for VAT within the group. This is one of the practical benefits of VAT grouping for businesses with multiple connected entities — it removes both the connected party pricing risk and the cash flow timing on intra-group VAT.