The Intellectual Property (IP) Box Regime that is followed in Cyprus ranks the island as one of the top destinations for innovative technology companies to relocate and continue their businesses. When it comes to selecting a jurisdiction to perform IP activities, software development businesses must find a jurisdiction that matches their companies' needs, while at the same time safeguarding its IP. Cyprus offers a sense of security and the ideal environment for asset development.
Cyprus has also recently been described as a hub for IT Services and an ideal location to create new business models and digital ideas. In 2019 the government has emerged its 2019-2023 national strategy to build on research and development. This had led to a number of initiatives to be enforced in order to protect and assist the development of the IT Industry. IP Box regime is one of this.
Why Cyprus:
Cyprus is in full compliance with both the EU and OECD standards and IP Box regime is in line with the provisions of the modified nexus approach.
Cyprus offers a high qualify of living, low crime rates, various options for private healthcare and education and a low cost of living in comparison with other EU countries. Cyprus is strategically positioned between Europe, Africa and Middle East allowing easy access to a broad range of countries. Cyprus also has an extensive list of Double Tax Treaties with a number of countries, allowing a company to receive royalties from such jurisdictions at reduced rates.
Cyprus also offers a large range of highly educated, trained and experienced software development workforce that is ready to be employed and can assist a company relocating in Cyprus setup their offices and create real economic substance that is a key issue. Another reason why Cyprus is attractive to new investors and entrepreneurs is the country's low operating costs and favourable immigration framework since all European Economic Area member states are permitted to work freely.
In addition to the above, Cyprus also offers a number of personal tax incentives. Tax residents in Cyprus can benefit from a 50% deduction on their personal income tax for a period of 10 years, assuming certain conditions are met. Also, non-domiciled individuals that become Cyprus tax residents can enjoy tax exemptions on dividends and interests for a period of 17 years.
How IP regime works:
Under the new regime, 80% of qualifying profits generated from qualifying assets are deemed to be tax deductible. Cyprus IP companies can achieve an effective tax rate up to 2.5% on qualifying profits earned from exploiting qualifying IP.
"Qualifying intangible asset" is defined as an asset which was acquired, developed or exploited by a person in furtherance of his business, (excluding intellectual property associated with marketing) and which is the result of research and development activities and includes intangible assets for which only economic ownership exists. Examples of such assets can be seen below:
- Patents as defined in the Patents Law
- Computer Software
Qualifying intangible assets specifically exclude:
- Trademarks
- Business Name
- Brands
- Image Rights
- Other intellectual property rights used for the marketing of products and/or services.
"Qualifying profits" are calculated based on the "nexus approach". More specifically, the level of profits eligible for the 80% tax exemption will depend on the level of R&D expenditure carried out by the taxpayer to develop the qualifying asset. The qualifying profits are calculated based on the following formula:
| QP = OI multiplied by (QE + UE) OE |
Whereby:
QP: Qualifying Profit
OI: Overall Income
QE: Qualifying Expenditure
UE: Uplift Expenditure
OE: Overall Expenditure
"Overall Income (OI)": is defined as the gross income derived from qualifying intangible assets during the tax year less any direct costs incurred for generating the income.
A few examples of such types of income are:
- Royalties
- Amount for grant of a licence for exploitation of asset
- Any amount relating to insurance or compensation of the assets
- Income from disposal of asset
A few examples of direct costs are listed below:
- Any allowable costs that have been incurred wholly and exclusively for the generation of gross income
- Amortisation of the cost of the assets (over the life of IP, with a max of 20 years)
- Notional interest deduction associated with qualifying asset.
"Qualifying expenditure (QE)": is defined as, but not limited to:
- Wages and salaries
- General expenses for Research and Development (R&D) activities
- Direct costs
- Commission expenses associated with R&D activities
Qualifying expenditure do not include the below:
- Acquisition cost of the intangible asset
- Interest paid or payable
- Cost for acquisition or construction of immovable property
- Any costs not directly linked to the qualifying asset
"Uplift Expenditure (UE)": is added to the qualifying expenditure, which will be equal to the lower of:
- 30% of QE or
- The total costs of acquiring the qualifying asset plus the cost of outsourcing to related parties of any research and development
The purposes of the uplift expenditure is to ensure that the nexus approach does not penalise taxpayers excessively for acquiring IP or outsourcing R&D activities to related parties.
Overall Expenditure (OE): relating to qualified intangible assets is defined as the sum of:
- The qualifying expenditure and
- The total cost of acquiring the qualifying asset plus the cost of outsourcing to related parties of any research and development costs outsourced to related parties incurred in any tax year.
Calculation of taxable profit
80% of the overall profit derived from the qualifying intangible asset is treated as a deductible expense. Every year the taxpayer may elect not to claim the whole or part of this allowance.
In the case of a resulting loss, only 20% of the loss can be surrendered to other group companies or be carried forward to subsequent years.
Qualifying taxpayers that are eligible for the IP regime include Cyprus tax resident persons, permanent establishments (PEs) of non- resident person and foreign PEs that are subject to tax in Cyprus.
Other considerations
Individuals and companies aiming to claim exemptions under the Cyprus IP regime must ensure that correct accounting books and records are kept in regards to the income and expenditure of their intangible asset.
When registering a product, entrepreneurs are able to protect their ideas from their competition while at the same time transforming their innovative products/services into financial values. Licence agreements can also be prepared in order for companies to obtain royalty income.
In the recent years, there has been a large rise in IT companies relocating to Cyprus and there has been a development in this industry. Intellectual Property Law of Cyprus and the IP Box regime are highly responsible for this emergent interest. Intellectual Property Law of Cyprus has an advantage over the other IP Box regimes since Cyprus allows a wider range of income such as gains on the disposal of IP assets. Cyprus is already home to a number of international tech companies and aims to become home to many more in the future.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
