Cyprus entitles profit from qualifying IP assets to benefit from an 80% tax deduction, resulting in an effective tax rate of 2.5% or less. The regime, known as the ‘IP Box’, benefits software, patents, utility models and other intellectual property assets.
What assets qualify for the IP Box?
Qualifying intangible assets are those acquired, developed or exploited in the course of carrying out a company’s business and can include:
- computer software
- other intangible assets which are non-obvious, useful and innovative, used in the ordinary course of business.
Intangible assets can include utility models and non-obvious, useful and novel IP, where utilised in a business does not generate annual gross revenues in excess of €7,500,000 from all intangible assets (or €50,000,000 in case of a group of companies).
Business names, brands, trademarks, image rights and other intellectual property rights used for the marketing of products and services do not fall under qualified intangible assets.
What is the benefit?
When implemented, the IP Box may result in 80% of qualifying profits derived from qualifying assets to become tax deductible.
Taking into account that Cyprus applies a corporate tax rate of 12.5% on profit, the IP Box regime can result in an effective tax rate of as low as 2.5%. Where a loss is incurred, only 20% of this loss can be surrendered to other group companies or be carried forward to subsequent years.
What are qualifying profits and qualifying expenditure?
Qualifying profits refers to the proportion of the overall income corresponding to the fraction of the qualifying expenditure, plus the uplift expenditure over the overall expenditure incurred for the qualifying intangible asset concerned.
Qualifying expenditure for qualifying intangible assets is the sum of all R&D costs incurred during any given tax year exclusively for the development, improvement or creation of qualifying intangible assets, and which costs are directly related to such assets. Qualifying expenditure includes salaries, direct costs, general expenses relating to R&D installations, commission expenses associated with R&D activities, costs associated with outsourced R&D.
Additional incentives and benefits
The IP Box regime, combined with the following characteristics, place Cyprus at the forefront of EU jurisdictions for the development of technology IP:
- the standard corporate tax on profit is 12.5%
- dividend payments to investors outside Cyprus are exempt from taxation, enabling most tech entrepreneurs to minimize their overall tax burden
- equity investments in Cyprus companies can benefit from a notional interest deduction (NID), which is deductible against a company’s taxable profits that arise as a result of the newly introduced capital (cannot exceed 80% of the taxable profit, as calculated before the deduction)
- investments in innovative small businesses can be deducted from taxable income, up to an annual limit of €150,000
- Cyprus has signed 62 tax treaties to help ensure that companies avoid double taxation
- the intellectual property regime is aligned with the latest developments in the digital economy.
The Cypriot IP Box regime complies with the provisions of the modified nexus approach and is aligned with Action 5 of the Base Erosion and Profit Shifting (BEPS) plan of the OECD.
Contact our IP practice to discuss your precise requirements.