Cyprus intellectual property tax regime benefits

Cyprus intellectual property tax regime

Cyprus a tax haven for intellectual property assets

The Cyprus IP regime Cyprus is an attractive location for the establishment of an IP holding and development company, offering an efficient tax rate as well as the legal protection afforded by EU Member States and by the signatories of all major IP treaties and protocols.

Background

Cyprus intellectual property regime is fully compliant with international developments in the tax treatment of IP income and OECD’s guidance.

The IP regime has been reviewed by the EU Code of Conduct and has been assessed as fully compatible with EU standards.

Cyprus IP tax regime – now possible for a reduction of tax rate to as low as 2,5%

Cyprus intellectual property tax regime benefits: 80% of the profits qualifying for the regime are exempt from tax.

With a corporate tax rate of 12.5%, this can result in an effective tax rate of as low as 2.5%.

Relevant details of the regime Under the Cyprus intellectual property tax regime, 80% of the qualifying profits generated from the qualifying assets is deemed to be a tax deductible expense for qualifying taxpayers. In calculating the qualifying profits, the new regime adopts the ‘Nexus’ approach.

According to this approach, the level of the qualifying profits is positively correlated to the extent the claimant performs R&D activities to develop the qualifying asset (QA) within the same company.

Qualifying assets

Qualifying assets under the new regime include:

  • patents,
  • copyrighted software programs, and
  • other intangible assets that are non-obvious, useful and novel.

Qualifying assets do not include trademarks and copyrights.

Qualifying persons

Qualifying persons include Cyprus tax resident taxpayers, tax resident Permanent Establishments (PEs) of non-tax resident persons as well as foreign PEs that are subject to tax in Cyprus.

Qualifying profits

Qualifying profits are calculated in accordance with the nexus fraction that follows.

 

OI XQE + UE

OE

Where:

OI is the “overall income derived from the QA”

QE is the “qualifying expenditure on the QA”

UE is the “uplift expenditure on the QA” and

OE is the “overall expenditure on the QA”

 

The nexus fraction

The nexus fraction is used to determine the amount of qualifying profits that will give the relevant deduction to the taxpayer.

Overall Income (OI)

The overall income (OI) is calculated as the gross income less any direct expenditure (including the capital allowances) of this asset, i.e. the gross profit. Overall income includes, but is not limited to, royalties received for the use of the intangible asset, trading income from the disposal of qualifying asset and embedded income earned from the qualifying asset.

Capital gains arising from the disposal of a QA are not included in the overall income and are fully exempt from tax.

Qualifying Expenditure (QE)

The qualifying expenditure includes salary and wages, direct costs, general expenses associated with R&D activities and R&D expenditure outsourced to unrelated parties.

The QE does not include any acquisition costs of the IP, interest paid or payable, any amounts payable to related persons carrying out R&D and costs which cannot be proved to be directly associated with a specific QA.

Uplift Expenditure (UE)

The up-lift expenditure (UE) is the lower of:

  • 30% of the QE and
  • The total acquisition cost of the QA and any R&D costs outsourced to related parties.

Overall Expenditure (OE)

The overall expenditure (OE) is the sum of:

  • The qualifying expenditure and
  • The total acquisition costs of the QA and any R&D costs outsourced to related parties incurred in any tax year.

Cumulative nexus fraction

The nexus approach is an additive approach; the calculation requires both that QE includes all qualifying expenditures incurred by the taxpayer over the life of the IP asset and that OE includes all overall expenditures incurred over the life of the IP asset.

Illustrative example

Once the nexus fraction is calculated, this will be used to determine the deduction available for each QA, as illustrated in the example.

EUR
Revenue 35.000.000
Less: Direct expenditure from IP asset – 15.000.000
Overall income (OI) 20.000.000
Assume nexus fraction of 90%
Qualifying profits- 90% (nexus fraction) of OI 18.000.000
Less: 80% exemption on qualifying profits – 14.400.000
Taxable qualifying profits 3.600.000
Remaining OI (10% of OI) – Note 1 2.000.000
Total taxable profit 5.600.000
Tax @ 12.5% 700.000
Effective tax rate – Note 2 3,5%
Remaining OI (10% of OI) – Note 1 2.000.000
Total taxable profit 5.600.000

 

Note 1: The remaining overall income is added to the taxable qualifying profits and the total is subject to tax at the corporate tax rate of 12.5%

Note 2: The effective tax rate can be reduced to 2.5% with a nexus fraction of 100%

 

Losses from the qualifying assets

Where the calculation of qualifying profits results in a loss, only 20% of this loss may be carried forward or group relieved.

Other intangible assets

Other intangible assets that are used in the business of a taxpayer and do not qualify for the IP regime may still benefit from other provisions of the Cyprus tax law. In particular, capital allowances and/or notional interest deduction (NID) may be available to these assets, which will help reduce the overall effective tax rate of the company. Examples of such assets include trademarks, copyrights and other intellectual property assets

Capital allowances

As from July 2016, the capital costs of intangibles (excluding goodwill and qualifying assets as defined in the IP regime) are tax deductible in the form of capital allowances. The cost is spread over the useful life of the asset with a maximum useful life of 20 years.

Notional Interest Deduction (NID)

NID may be available on assets introduced in a Cyprus company through equity which are employed in the production of taxable income.

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