In May 2012, Cyprus introduced changes in Income Tax law which constitute Cyprus as the ultimate royalty jurisdiction, enabling it to compete successfully with other established jurisdictions like Luxemburg, Netherlands etc. The main features of the Cyprus IP box are outlined below:
IP Box benefits
- The amendment to the Income Tax Law is effective from January 1st 2012 and apply to all categories of intellectual property, including the rights set out in the Patent Law of 1998 as amended, the Intellectual Property Rights Law of 1976, as amended and the Trade marks Law. Cap as amended, covering all IP assets, including patents, trademarks copyrights, formulas, designs, know-how and processes.
- The new tax regime provides for favorable tax treatment in relation to income generated from IP rights, by exempting from corporation tax 80% of royalty profit, i.e. only 20% of the IP income after deducting all costs relating to the generation of the income is subject to 12,5% corporate tax.
Thus the effective tax rate of a Cyprus royalty company is 2,5% or less by taking into consideration the capital allowances and expenses, being the lowest in Europe comparing favorably against Netherlands where it is 5% and Luxembourg where it is 5,75%.
- In the event that IP related costs and deductions exceed revenue earned from IP assets the loss may be offset against other income for the year or future profits.
- The 80% exemption also applies for capital gains arising in case of disposal of the IP. But in this case, a full tax exemption from capital gains tax applies, if the shares of the IP Company are sold.
- The cost of acquisition or development of an IP right acquired by a Cyprus company, maybe capitalized and written off on a straight line basis over 5 years giving an annual writing down allowance of 20%
Other benefits of Cyprus companies
- No withholding taxes upon distribution of dividend to non Cyprus tax residents
- As Cyprus is member of European Union, the EU royalty directive applies under which royalty paid by other EU countries to Cyprus royalty company is with zero withholding tax.
- In case of non EU countries, with which Cyprus has favorable double tax treaties, lower or zero withholding taxes on royalties apply and tax credits are issued against Cyprus taxation, e.g. Double tax treaty with Russia: 0% withholding tax on royalties. In the case of the Double Tax Treaty with Ukraine, 2% withholding tax on royalty applies but tax credit is issued reducing tax paid in Cyprus at the effective rate of 2,5%
Comparison with other IP regimes
|Effective tax rate||2.5 percent||6.8 percent||9.5 percent||5.76 percent||5 percent||10 percent|
|Qualifying IP assets||All IP assets, including patents, trademarks, copyright, formulas, designs, know-how and processes||Patents and supplementary patent certificates||Patents, know-how, trademarks, business names, know-how and copyrights||Patents, trademarks,Designs, domain names, models and software copyrights||Self-developed IP relating to patents or approved R&D||UK and European patents, supplementary protection certificates and plant variety rights|
|Ineligible IP assets||None||Know-how, trademarks,Designs, models, formulas or processes||None||Know-how, formulas, copyrights (other than software)||Trademarks and brands.Acquired IP||Trademarks, copyrights and designs|
|Internally developed or acquired?||Applies to both internally developed and acquired IP||Internally developed IP and improvements to acquired IP||Applies to both internally developed and acquired IP||Applies to both internally developed and acquired IP, but not IP acquired from a related party||Self-developed only||Self developed and “actively managed” (use in business) only|
|Limitations on where R&D takes place||None||Some||None||None||Some||None|
|Qualifying revenue||All income, including compensation for breach of rights, net of costs||Patent income||Royalties||Royalties net of costs (amortization, R&D costs, interest etc)||Net income from qualifying assets||Net income from qualifying IP|
|Deduction rate||80 percent||80 percent||50 percent||80 percent||None reduced tax rate||None reduced tax rate|
|Overall limit of deduction||None||100 percent of pre-tax income||50 percent of pre-tax income||None||None||None|
|Gains on disposal included||Yes||No||Yes||Yes||Yes||Yes|
As noted above, Cyprus’s IP box regime provides a maximum tax rate of 2,5 percent on income earned from IP assets. The comparable rate in its nearest competitor, the Netherlands, is twice that amount, at 5 percent. Luxembourg (5,76%) and Belgium (6,8%) are close behind the Netherlands but far behind Cyprus.
The Cyprus IP box regime applies to a wider range of income than any other European scheme, most of which restrict benefits to income from patents and supplementary patent certificates. There is no cap on benefits, there is no requirement regarding self-development of the IP and there are no restrictions on where the expenditure on acquisition or development of IP is incurred.
While Luxembourg, Netherlands and UK schemes offer partial exemption of gains on disposal, the exemptions are less attractive than those provided by the Cyprus scheme, due to limitations on qualifying assets and generous deduction rates. Furthermore, full exemption can be relatively easily obtained in Cyprus by holding the IP assets in a separate company and disposing of the shares in the company, as described above.
As analyzed above, Cyprus offers the most flexible and favorable tax regime for “IP box”. In most cases, immediate economic and tax savings can be accomplished by transferring intellectual rights currently held by entities located in low or no-tax jurisdictions to Cyprus resident companies in order to take advantage of the new exemptions. The transfer of IP rights into a Cyprus company will not attract any from of taxation in Cyprus and the new benefits and substantial exemptions will become available as soon as the asset is transferred.
The Cyprus IP box provides attractive opportunities for structuring the exploitation of IP assets through Cyprus and in particular through the use of Cyprus-resident IP owners, especially in conjunction with Cyprus extensive network of double tax treaties, under which withholding tax on royalty income is either eliminated or substantially reduced.
Edited by Phani Schiza Antoniou,