Cyprus IP Box 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.
Benefits of the Cyprus IP regime
The IP box regime provides a tax benefit of up to 80% for the IP profit that qualifies. It applies the approach of notional expense deduction. 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 IP 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 under the new regime include:
- Software programs with a copyright
- Other intangible assets that is not obvious but are useful and novel
NOTE: qualifying assets do not include trademarks and copyrights
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 are calculated in accordance with the nexus fraction that follows.
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)
QE can be salary/wages, direct costs, general expenditure linked to R & D activities, and R&D expenditure from independent sources. It does not include any expenses of IP acquisition, paid or payable interest, any costs payable to related persons handling R&D, and costs that cannot prove a direct link with specific QA.
Uplift Expenditure (UE)
The up-lift expenditure (UE) is the lower of:
- 30% QE and
- The total of QA acquisition and any R&D costs from related participants.
Overall Expenditure (OE)
This is expenditure relating to the qualifying intangible assets as the total of;
- QE and
- The sum of cost acquisition of QA and cost outsourced from related parties of any R&D assets as incurred during any year taxable.
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.
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.
Amendments to Cyprus IP Box Regime
As from 1 January 2020, the following new provisions are put into effect:
Preparation of balancing statement in case of disposal of the IPs
The obligation to prepare a balancing statement on the disposal of an intangible asset is abolished. As such, no balancing addition or balancing deduction would be included in the taxpayer’s taxable income in the year of disposal.
The taxpayer has the option not to claim capital allowances in a given year. Moreover, capital allowances that have not been claimed in a year are claimed over the remaining useful life of the asset. Consequently, the tax written down value of the IP at the beginning of each year will be recalculated over the remaining useful life of the IP.
After the calculation of the nexus fraction, it is possible to find the deduction for each QA. Consider the example below assuming a nexus fraction of 90%.
|Less; IP asset expenditure||-8.000.000|
|QP – 90% of OI||3.600.000|
|Less 80% exemption on QP||2.880.000|
|Remaining OI (10% OI)||400.000|
|Taxable profits total||1.120.000|
|Tax @ 12.5%||140.000|
|Effective rate for taxation||3.5%|