IP Box Cyprus

Cyprus Intellectual Property (IP) Box Regime

The new IP regime (IP Box) as amended and applied from 1st July 2016, was amended in respect of Income Tax Law. The aim was to align the existing Cyprus IP tax legislation with the clause 5 of the Base Erosion and Profit Shifting (BEPS) project of the OECD.
This legislation includes specific transitional provision for Intellectual Property assets that exist under the current IP box regime. Now, taxpayers will continue receiving benefits from the current system for up to five years. The new IP tax regime shall apply after the period.

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What is the Cyprus Intellectual Property (IP) Box Regime?

Background

The IP regime in Cyprus is compliant with international developments. It follows the guidance of the IP income and OECD on tax treatment.
The IP regime has been thoroughly assessed and approved as fully compatible with EU standards.

Benefits of the existing IP Box

Generally, both the transitional and the new IP box regimes provide a tax benefit of up to 80% for the IP profit that qualifies. It applies the approach of notional expense deduction. The corporation tax is Cyprus is 12.5%, which will result to a tax rate of up to 2.5%.

Details of the regime

According to this, qualifying assets (QA) can be developed within the same company. And the level of this QA has a positive correlation to the stretch the claimant does R & D activities.

Qualifying assets

Under the new regime, the following assets include:

Patents
Software programs with a copyright
Other intangible assets that is not obvious, but are useful and novel.

NOTE: Trademarks and copyrights on their own are not included as qualifying assets.

The new IP regime is compliant with the provisions of the revised ‘Nexus approach.’ Here non-tangible property needs to show a direct relationship between the QA and the owned expenses as they contribute to the income.

The Nexus fraction

This fraction is used in determining the range of qualifying profits relevant to the deductions on the taxpayer. Important terms in this regard include:

Overall income (OI)
OI is calculated as the gross income minus direct expenditure. This consists of the capital allowances of the assets, royalties received for the use of non-tangible assets, income from the trade of disposable QA, and embedded income originating from the qualifying asset. It does not include capital gains from QA disposal.
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)
This expenditure is calculated as a less;
- 30% QE and
- The total of QA acquisition and any R&D costs from related participants.
Overall Expenditure
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.

Qualifying profit (QP)

Qualifying profit can be described in terms of the proportions of the overall income (OI) that arise from QA, as it corresponds to the fraction of the sum of QE and UE divided by OE received from the qualifying intangible asset.

The formula for deriving QP is:

QP = 01 x

Accounting records

Anyone who wishes to claim benefits in the new regime must prove a proper account. Hence, they must keep books of account as well as income/expense records for each intangible asset.

Non-qualifying assets

Over the useful life of an asset, the acquisition expenditure of an intangible asset that doesn’t qualify for transitional provision can be amortized. Also, the asset must have been used in the growth of the business. This provision works per accepted accounting regulation for up to 20 years.

If the asset is disposed of for any reason, there must be proved with a balancing statement. Also, in the cases of disposal of fixed assets goes through the same process. Note that goodwill cannot be involved with amortization.

Illustration by example

Upon the calculation of the nexus fraction, the result can be used to find the possible deduction for each QA. Consider this example. Assuming the nexus fraction is 90%.

	Euro
Revenue	35,000,000
Less; IP asset expenditure	-15,000,000
OE	20,000,000
QP – 90% of OI	18,000,000
Less 80% exemption on QP	-14,400,000
Taxable QP	3,600,000
Remaining OI (10% OI) *Note 1	2,000,000
Taxable profits total	5,600,000
Tax @ 12.5%	700,000
Effective rate for taxation **Note 2	3.5%

* Note 1: The remaining OI is added to the taxable QP and the sum can be taxed at the corporate rate of 12.5%.
** Note 2: The effective rate can be brought down to 2.5% using a 100% nexus fraction.