In 2016, Cyprus adopted amendments to the Income Tax Laws and to the Cyprus Intellectual Property (IP) regime, to fully comply with the EU legislation and the relevant OECD recommendations of the BEPS Action 5. The amendments apply retrospectively as from 1 July 2016.
The new IP Box regime applies for qualifying IP assets which are developed after 1 July 2016. Provided such an asset qualifies as an IP asset, the company is entitled to a notional expense for tax purposes equal to 80% of its ‘qualifying profits’. The remaining 20% of profits will be subject to the normal corporate rate of 12,5% thus giving a maximum effective tax rate of 2,5%.
i. Qualifying assets are restricted to
- computer software,
- other IP assets which are legally protected and fall under one of the following:
a. non-obvious, useful assets and from which the income of the company does not exceed, in a 5-year period, €7.500.000 per annum (€50.000.000 for taxpayers forming a Group). Such assets should be certified by an appropriate
authority either in Cyprus or abroad
b. utility models
ii. Qualifying assets do not include trademarks, image rights, brands and other intellectual property rights used for the marketing of products or services.
For a qualifying IP asset to benefit from a patent box regime, there should be sufficient substance and an essential relevance between the expenses, the IP assets and the related IP income. Under this approach, the application of the IP regime will be dependent on the level of Research and Development (R&D) carried out by the qualified company wholly and exclusively for the development of the qualifying IP whereas it excludes the R&D costs of outsourcing to related parties. On the contrary, R&D costs outsourced to non-related parties are considered as part of the ‘qualifying expenditure’.
Based on the above considerations, the following formula will be used to determine the qualifying profits:
[(Qualifying expenditure + Up-lift expenditure)/Total expenditure] * Overall IP Income
a. Qualifying expenditure includes any direct costs relating to the development of the IP but does not include
- any cost of acquisition of intangible assets,
- interest paid or payable,
- costs for the acquisition or development of immovable property
- amounts paid or payable to related parties in relation to R&D.
b. Up-lift expenditure provides for the lower of
- 30% of ‘qualifying expenditure’, or
- the total amount spent for the cost of acquisition and the R&D outsourced to related parties.
c. Total expenditure includes the overall expenditure of the company related to the development of the IP either qualifying or not.
d. Overall IP Income includes the gross IP income less the direct costs incurred for the generation of the income (including amortization of the intangible asset as well as any notional interest deduction on equity used to finance the development of the qualifying asset).
Obligation to have proper account
Anyone who wishes to claim benefits in the new regime shall keep books of account as well as income/expense records for each intangible asset.
- The capital cost of any qualifying intangible asset is tax deductible as a capital allowance.
- Capital gains arising from the disposal of a qualifying asset are not included in the qualifying profits and are fully exempt from income tax.
- Where the calculation of qualifying profits results in a loss, only 20% of this loss may be carried forward or group relieved.
- The company may choose to forego the whole or part of the deduction in each year of assessment.
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