The New Cyprus Intellectual Property Tax Regime (IP Box Regime)

The New Intellectual Property (IP) Tax Regime in Cyprus

On 14 October 2016, the House of Representatives passed amendments to the Income Tax Law in order to align the current Cyprus IP tax legislation with the provisions of Action 5 of the OECD’s Base Erosion and Profit Shifting (BEPS) project.

The nexus fraction is used to determine the amount of qualifying profits that will give the relevant deduction to the taxpayer. In such cases, taxpayers would continue to benefit from the existing IP regime for a maximum of 5 years, after which date the new IP tax regime will be applied.

Taxpayers should be familiar with the process of calculating the qualifying profits and ensure they have proper accounting in place to separate out relevant income streams and gather information on R&D spend, in order to perform the nexus calculations.

We, at PHS, can carefully examine the potential impact of the new tax provisions on the existing or potential IP structures and operations. We are experts in IP Box Regime legislation and can calculate nexus fraction, provide accounting and audit services for IP as well as prepare the required set of documents needed for the IP.

TAX BENEFITS OF THE IP BOX REGIME IN CYPRUS

• 80% exemption of qualified profit from exploitation of IP assets

80% of the profit earned from the use of intangible assets is deducted for tax purposes. So, only 20% of IP income after deduction of the costs of earning the income, is taken into calculation. Therefore applying to Cyprus corporate tax rate of 12.5%, which is among the lowest in the EU, provides the effective tax rate of 2.5%.

• 0% tax on the gain from disposal of IP assets as a capital nature transactions

On 17 July 2020, the Cypriot House of Representatives approved a bill amending Section 9(1)(l) of the Income Tax Law which introduced a number of changes with respect to the tax treatment of intangible assets. Specifically, if disposal of intangible assets is a capital nature transaction then the resulting capital gain should not be taxable. The changes became effective from 1 January 2020 and the obligation to prepare a balancing statement upon a transfer or sale of an intangible asset is abolished.

• Up to 20 years amortization period

Capital expenditure related to IP acquisition or development may be deducted in the first tax year in which the expense was incurred as well as in the subsequent years. That is, development or acquisition expenses are amortized over a period of up to 20 years.

NEXUS FRACTION

Qualifying intangible Assets

Qualifying assets are those acquired, developed or exploited by a company in the course of its business and that they relate to an IP, are a result of R&D expenditure and for which the person is the economic owner such as:

• Patents
• Computer software
• Other legally protected IP like:
  • Non-obvious , useful and novel assets where the person which utilizes them in furtherance of a business does not generate annual gross revenues exceeding €7.500.000.
  • Utility models, IP assets that provide protection to plants and generic material.

Non – Qualifying intangible Assets

• Business names (Brands)
• Trademarks
• Image rights
• Other IP rights used to market products.

Qualifying Profits

• Royalties
• Licensing fees
• Gain from sale of the IP
• Insurance proceeds received as compensation in relation to the IP
• Embedded income that relates to sale of goods or services directly related to the IP.

Formula to calculate 80% deduction

• QE+UE x OI

             OE

QE: Qualifying Expenditure of capital nature used wholly & exclusively for research & development purposes such as:

• Direct & Facility expenses
• Salaries
• Outsourced expenses payable to unrelated party

QE do not Include:

• Acquisition cost
• Outsourced expenses to related party
• Interest
• Other costs not related to R&D

UE: Uplift Expenditure means the lower of:

1. 30% of QE, or
2. Total of cost of acquisition and R&D outsourced to related parties

OE: Overall Expenditure is the total capital expenditure relating to the creation of the IP.

OI: Overall Income is the gross income derived from the IP minus costs incurred to produce this income.

ILLUSTRATION OF THE NEW IP TAX REGIME

 ‘X’ Ltd, a Cyprus registered company, designed an application for App Store having the following income and expenses

Gross license fee income	€532.000
Direct Costs	€20.000
Salaries paid for the design	€60.000
R&D fees outsourced to a 3rd party	€40.000
R&D fees to a related company	€60.000
Amortization – assuming useful life of 5 years	€32.000

 

QE= €60.000+€40.000 = €100.000

OE= €60.000+€40.000+€60.000 = €160.000

UE= €30.000 (€100.000 x 30%) OR €60.000. Hence, the lower is €30.000

OI= €532.000-€20.000-€32.000 = €480.000

 

Qualifying Profit Calculation for IP purposes:

QE+UE x OI = €100.000 + €30.000 x €480.000 = €390.000

OE                       €160.000

80% exemption on Qualifying profit:

390.000 x 80% = 312.000

 

Tax effect

Gross license fee income	€532.000
Less: Direct Costs	(€20.000)
Less: Amortization	(€36.000)
Overall income (OI)	€480.000
Less: 80% exemption on qualifying profits	(€312.000)
Total taxable profit	€168.000
Tax @ 12.5%	€21.000
Effective tax rate (Tax/OI)	4,375%

 

• How PHS can help you regarding Intellectual Property Law

PHS is a leading tax firm in Cyprus, supported by a team of qualified tax experts. The firm is recognised for in-depth knowledge in Cyprus and international taxation, particularly with respect to corporate tax, personal tax and VAT

We are experts in IP Box Regime legislation, providing accounting and audit services, as well as carefully examine the potential impact of the new provisions on the existing or potential IP structures and operations. Among others we can assist you with:

• Set up Cyprus IP holding structures
• Corporate statutory compliance matters
• Drafting and advising on IP agreements
• IP registrations
• Existing IP tax efficient transfer to Cyprus IP company
• Royalty payments
• IP related substance
• Ongoing support