Cyprus Intellectual Property tax (IP) (Intellectual Property (IP) regime)
1. Cyprus Intellectual Property (IP) tax effective from 1 July 2016
The provisions of the new Cyprus Intellectual Property (IP) regime are effective from 1 July 2016. According to the new 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 taxable 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 are 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.
2. Cyprus Intellectual Property (IP) regime effective until 30 June 2021
Under the provisions of the old Cyprus Intellectual Property (IP) regime, qualifying intangible assets are those defined in the Patent Rights Law, the Intellectual Property Law, and the Trademarks Law.
In calculating the taxable profit, an 80% deemed deduction applies to the net profit from the exploitation and/or disposal of such intangible assets.
Any capital gain from the sale of such intangible assets by any person who did not enjoy the tax benefits of the provisions of the old Cyprus Intellectual Property (IP) regime is exempt from Cyprus Income Tax.
The net 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.
Where a net loss is created, only 20% of such loss is eligible to be surrendered for group relief or carried forward. The taxpayer may forego the whole or part of the deduction in each year of assessment.
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