In October 2016, the House of Representatives of Cyprus amended the IP tax box regime, in alignment with the provisions of the OECD DEPS Action 5 and the EU rules on this matter. Furthermore, it is to be noted that the amendments do provide for certain transitional arrangements for the beneficiaries of the previous IP box regime, which was introduced in 2012.
The main characteristic of the Cyprus IP Tax Box consists in providing for a tax exemption of 80% on the income derived from the use of eligible intangible assets. As the corporate tax rate in Cyprus amounts to 12.5%, the effective tax rate on the said IP assets could be 2,5% or even less, making the Cyprus IP Box one of the most competitive worldwide.
What are the provisions of the amended IP Box Regime?
The main change is the restriction of the eligible IP assets, as previously the IP Box Regime covered a wider range of IP assets.
Therefore, the amended IP Tax Box provides for:
Eligible intangible assets
These include any assets that have been acquired, developed or used by a party for business purposes (excluding intellectual property related to marketing).
The assets that fall under the provisions of the amended IP Box are the following:
- Computer software;
- IP Assets that meet the following conditions:
- They are nonobvious, useful and novel;
- They are used for the business (development) purposes;
- They do not generated annual gross revenue over the amount of 7.500.000 EUR or in case of a group of companies 50.000.000 EUR.
Please note that business names, trademarks, image rights and marketing IP are NOT considered as qualifying/eligible assets.
Overall income refers to the gross income accrued from the use of a qualifying assets minus the direct expenses for generating the said income. Direct expenses include amortisation of the cost of the asset, the notional interest on equity that has financed the R&D of the eligible IP assets.
80% of the total income derived from the use of a qualifying asset can be treated as deductible expense.
The following fall under the definition of the said income:
- Licensing fees;
- Amounts received from insurance or as compensation regarding eligible IP assets;
- Capital gains, income derived from the sale of eligible IP assets;
- Embedded income derived from the sale of products or procedures that are directly related to eligible IP assets.
Eligible expenses refer to the amount dedicated for the R&D of any eligible IP asset incurred in any tax year. Such expenses include among others:
- Wages and salaries;
- Direct costs;
- R&D general expenses;
- Expenses for supplies associated with R&D activities;
- Costs related to R&D outsourced to third non-related parties.
The following expenses are NOT considered eligible:
- Cost for the acquisition of the IP assets;
- Paid or payable interest;
- Costs related to the acquisition or construction of immovable property;
- Amounts that cannot be proved that they are directly connected to a specific qualifying IP asset.
What transitional arrangements are provided by the Law?
The transitional amendments are addressed to the persons, who having benefitted from the previous IP Box regime, may be able to continue enjoying its benefits until the 30th of June 2021, provided that certain conditions are met.
The transitional provisions apply for intangible assets which were acquired:
- Before the 2nd of January 2016;
- Between the 2nd of January to the 30th of June 2016 from a related person directly or indirectly. The said assets at the moment of their acquisitions should have been under the previous IP Box regime or under an equivalent scheme in another country;
- Between the 2nd of January to the 30th of June 2016 from an unrelated person.
Although the range of eligible IP assets has been restricted, the IP Box regime in Cyprus continues to offer significant benefits to the concerned parties (including taxation at a rate of less than 2.5% for the eligible assets). For further information or for legal advice, it is recommended that you contact us.