Intellectual Property (IP) has become one of the fastest developed sectors in the last few years due to the increasing need for protecting the intangible assets owned by an individual or a legal entity. The term Intellectual Property is wide enough to cover a range of intangible assets such as Copyrights, Patented inventions and Trademarks. Choosing the ideal location for establishing an IP structure, an IP holder ensures the protection of the IP and takes advantage of the tax incentives offered by the chosen jurisdiction. Further information is provided in relation to Cyprus, one of the most beneficial EU jurisdictions for setting up an IP company.
The Cyprus IP Box Regime
Cyprus being a member of the EU, a party to the Madrid Protocol and a signatory to the Paris Treaty on the Protection of Industrial Property, offers protection of the IP on a national, European and International level. Cyprus offers a wide Double Tax Treaties network with more than 50 countries while it is included on the White list of OECD. On the 1st January 2012, Cyprus has implemented a new IP Box Regime, aiming to offer an attractive tax regime to the IP holders and at the same time to provide the greatest protection of IP on a national and international level. The new Cyprus IP Box Regime provides to the IP holders the following tax exemptions if an IP Company is established in Cyprus:
- The worldwide royalty income derived from IP owned by a Cyprus Company is exempted from income tax at the rate of 80%.
- Profit derived from the disposal of IP owned by a Cyprus Company is exempted from income tax at the rate of 80%.
- Effective Tax rate of 2.5%.
- Losses may be carried forward indefinitely.
- Provision of amortization period of 5 years.
- A Cyprus company now can own and license an IP asset without the previous obligation to establish a company in a low or no tax jurisdiction as the owner of the IP asset and the Cyprus Company acting as an intermediary company. As a result a more efficient and a cost effective procedure has been introduced.
The Modified “Nexus Approach”
On 14 October 2016, the Cypriot House of Representatives have passed amendments to the Income Tax Law in order to align the Cyprus IP tax legislation with the provisions of Action 5 as concluded by the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project. The purpose of the new amendments was to bring Cypriot legislation on taxation of income from exploitation or sale of intangible assets in line with the provisions of the OECD BEPS.
Provisions of the Cyprus IP Box that remain the same:
- 80% exemption of qualifying profit income received from IP rights after deducting direct expenses
- 80% exemption of profit from sale of the qualifying IP rights
- 5 year amortisation period
- IP assets benefiting under the current IP regime until 30 June 2021:
Taxpayers benefiting from the current IP regime shall continue to apply its provisions until 30 June 2021, as long as the intangible assets in question have their generated income or development completed as at 30 June 2016 subject to certain conditions where the intangible assets were acquired prior the 02 January 2016 up to 30 of June 2016.
- Embedded Income and Economic Ownership:
Embedded income arising from the commercial use of the IP assets or income from such assets for which only economic ownership exists, qualifies for the transitional provisions
The New Cyprus IP Box regime:
The Modified “Nexus Approach” provides that for an intangible asset to qualify for the benefits of the new regime, there needs to be a direct link between the qualifying income and the qualifying expenses contributing to that income.
A. Qualifying Intangible Assets(QIAs):
QIAs are the assets which were acquired, developed or exploited by a person within the course of carrying out its business and is a result of research and development (R&D) activities. This definition excludes business names, brands, trademarks, image rights and other IP rights used for the marketing of products and services.
B. Qualifying Profit (QP):
The Qualifying profit (QP) is comprised of the proportion of the Overall Income (OI) derived from the Qualifying Expenditure (QE) plus the Uplift Expenditure (UE) divided by the Overall Expenditure (OE). The amount of QP is illustrated by following the application of the below formula:
QE + UE
QP = OI x —————
C. Accounting Records:
Persons claiming benefits under the new regime have the obligation to maintain proper books of accounts as well as records of income and expenses for each intangible asset. Action 5 of the BEPS Report and in consequence the new Cyprus IP Box regime were introduced to address the concerns raised over the application of the nexus approach, the calculation of qualifying R&D expenditure and IP management in general. The new Cyprus IP Box ensures that by implementing the new rules it is consistent with the existing OECD rules on the phasing out harmful regimes.