Cyprus IP Box regime – Cyprus Intellectual Property regime of 2.5% corporation tax
The Cyprus Intellectual Property scheme provides for an 80% exemption on profits earned from the use of intangible assets (IP) leaving only 20% of IP income as taxable. In clear terms, taxation can be as low as 2.5% on profits earned from the use of intangible assets.
Cyprus has adopted Action 5 of the OECD in the action against the “Base Erosion and Profit Shifting” (BEPS). This requires a clear link between the rights that generate income and activities that contribute to such income (Nexus modified approach).
Cyprus Taxation advantages of a Cyprus company under Cyprus Intellectual Property (IP) regime (Cyprus IP box regime)
80% of qualifying profits generated from qualifying Intellectual property owned by a Cypriot resident company (net of any direct expenses) is exempt from Cyprus Corporation Tax (in case of a loss only 20% can be utilised either by surrendering to other group companies or carried forward against future profits)
The profit is calculated after deducting from the income and/or profit that is generated from the exploitation and/ or disposal of such intangible assets, all direct expenses associated with the production of this income or profit, as well as a 20% annual capital allowance, applicable on the cost of acquisition and/or development of such an intangible asset.
According to the Cyprus Intellectual Property regime, qualifying intangible asset means an asset that was acquired, developed, or exploited by a person in the course of carrying on a business and which constitutes intellectual property, other than marketing-related intellectual property, and which is the result of research and development activities, including an intangible asset for which there is only economic ownership.
Eligible intangible assets are-
- Patents, as defined in accordance with the provisions of the Cyprus Patents Law
- Computer software programs and
- Other intangible assets listed below which are legally protected.
- Utility models, intellectual property assets that provide protection to plants and genetic material, orphan drug designations, and extensions of patent protection.
- These should be non-obvious, useful, and innovative, where the person who utilizes them in the context of running a business does not obtain a gross income exceeding seven million five hundred thousand euros (€7,500,000) per year from all intangible assets and in the case of a group of such persons, the group does not achieve more than fifty million euros (€50,000,000) in worldwide turnover, using a five (5) year average for both calculations of the aforementioned amounts, but not the trade names, including brands (brands), trademarks, rights to the image and/or public presence/celebrity of a person (image rights) and other intellectual property rights used to market products and services. The eligible intangible assets referred to in this paragraph must be certified as such by a competent authority of the Republic or abroad.
In calculating the qualifying profit, an 80% deemed deduction applies to the qualified profit from the exploitation of such qualifying intangible assets which is calculated based on a specific formula that follows the modified ”nexus approach”. Capital gains arising from the disposal of a qualifying asset are not included in the qualifying profits and are fully exempt from income tax.
In arriving at the Qualifying Profits there must be a linkage between Intellectual property income with intellectual property-related costs (Nexus approach). The nexus approach follows an incremental approach. The calculation in arriving at the qualified profits requires that Qualified Expenditure QE includes all qualifying expenditures incurred by the taxpayer over the life of the IP asset and that Overall Expenditure OE includes all overall expenses incurred over the life of the IP asset. The relevant formula can be defined as:
Qualified profits = (Qualified expenditure + Uplift expenditure) X Overall income
- The qualifying expenditure includes salaries, direct costs, and related expenses outsourced to unrelated parties directly related to the Qualifying Asset (Intellectual property)
- The up-lift expenditure UE is the lower of:
- 30% of the Qualifying Expenditure and
- The total acquisition cost of the QA and any R&D costs outsourced to related parties.
- The overall income (OI) is calculated as the gross income less any direct expenditure (including the capital allowances) of the relevant asset.
Overall Expenditure means the total capital expenditure either qualifying or not, relating to the creation of the Qualifying IP i.e. cost of acquisition of the qualifying asset plus the cost of outsourcing to related parties, etc.
Income includes but is not limited to the following:
- Royalties or other amounts in connection with the use of the eligible intangible asset;
- Any amount for the grant of a license to operate the eligible intangible asset;
- Any amount derived from security or indemnity in respect of the eligible intangible asset;
- Proceeds from the sale of the eligible intangible asset, excluding capital gains;
- Embedded income of the eligible intangible asset resulting from the sale of products, services, or from the use of processes directly related to the intangible asset. (In the case of intra-group transactions embedded income should be supported by a transfer pricing study which supports the level of embedded income).
Where the calculation of qualifying profits results in a loss, only 20% of this loss may be carried forward or group relieved.
The taxpayer may forego the whole or part of the deduction in each year of assessment. Capital allowances can be claimed on the cost of any qualifying intangible asset
The above is applicable to residents of the Republic or to those who have a permanent establishment in the Republic and who are not residents of the Republic or to a permanent establishment located outside the Republic that is subject to tax in the Republic.
Other Cyprus Taxation advantages of a Cyprus company under the Cyprus Intellectual Property (IP) regime (Cyprus IP box regime)
- No withholding tax on royalty payments from EU companies to Cyprus Intellectual Property Companies (EU Directive – subject to conditions)
- Gains that arise on the disposal of Cyprus intellectual Property company’s shares are exempt from all taxes in Cyprus.
- Royalty deductibility in paying the company is subject to conditions
- No withholding tax on dividends paid by Cyprus Company holding Immovable Property.
Centralisation of Intellectual Property Management in Cyprus and its relevant advantages
- Enhance a company’s competitiveness
- Substantial operational synergies
- Global brand management
- Centralising technology
- Cost savings
- Better overall control of business risks
- Enhances group economic substance
- Cyprus over the years has been recognised as an international business hub
- Favorable legal framework
- Adequate infrastructure
- Geographic location
- Good time zone
- High standard of professional services
- Cyprus workforce 80% are university graduates
- Wide Cyprus double tax treaty network
- English is used as a business language
- The accession of Cyprus into the EU brought Cyprus Tax Legislation in line with EU legislation and OECD
Cyprus Law and Intellectual Property
- Cyprus legal system: Flexible and business-friendly. Modeled on the English legal system and common law.
- Cyprus Law: Fully harmonised with EU legislation. IP Cyprus Law covers and protects all recognised intellectual property rights such as 1) trade and service marks, 2) patents, and 3) industrial designs and copyrights. Examples are scientific work, computer software programs, literary work, secret formulas, musical work, artistic work, movies, databases, recordings, broadcasts, publications, etc.
- IP EU directives and regulations: All relevant IP EU directives and regulations apply and have been introduced into the Cyprus Law.
- Intellectual Property International Treaties and Protocols: Cyprus is a member and has ratified all major relevant IP International Treaties and Protocols including the Madrid Agreement, the TRIPS Agreement, the European Patent Convention, the Patent Co-operation Treaty, the Berne Convention, the Rome Convention, and the WIPO Copyright Treaty.
- Patents: (i) national registration (ii) Issuance of a certificate by the European Patent Office (iii) An International Patent under the provisions of the Patent Cooperation Treaty
- Trademarks: (i) By Cyprus Law and therefore throughout the territory of the EU (ii) being a signatory to the Paris Treaty (iii) being a party to the Madrid Protocol
- Copyrights: (i) By Cyprus Law and therefore throughout the territory of the EU (ii) being a signatory to the Bern Convention
- Enforcement: Very strict Cyprus Laws. The Police and Customs and Excise authorities have wide powers under the applicable Cyprus laws to enforce IP rights and prosecute criminal acts violating IP rights including powers to enter premises and seize counterfeited goods.
- Cyprus courts: Cyprus courts have the power to grant ex parte temporary injunctive relief and restrictive orders as well as final judgments and orders.
- Orders and judgments: Cyprus court orders and judgments are enforceable (i) automatically in every European Union member country pursuant to the applicable EU Regulation and (ii) in many other countries outside Europe by Virtue of Bilateral or International Treaties that Cyprus has signed.
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