Cyprus adopted a new IP Box Regime as per the provisions of the OECD BEPS Action 5 and the new EU rules for the tax treatment of profit from the utilization of intellectual property.

Intellectual Property (IP) is a commonly used term which includes mind creation results such as software programs, innovative algorithms and formulas, inventions, trade-secrets and know-how, manufacturing practices, marketing concepts, artistic works, designs, images, names and inventions used in commerce. It is one of the most valued assets a company may have.

IP Box Regime (known also as a patent box, innovation box or IP box) is under a corporate tax regime, used by several countries to incentivize research and development activities which concludes in lower taxes, by taxing incomes deriving from a license, sublicense, patent, sale or transfer of qualified IP assets.

IP maybe legally or economically owned by a qualifying person.

APPLY TO IP BOX CALCULATIONS UNDER NEW REGIME-(nexus approach):

Qualifying Assets (QA) under the new regime includes:

A. Patents as defined in the Patents Law, and
B. Copyright software programs, and
C. Utility models and intangible assets that grant protection to plants and genetic material, orphan drug designations, and
D. Other intangible assets that are non-obvious, usful and novel, that are certified as such by a designated authority and where the tax payer satisfies size criteria

Do not include marketing-related intangible asset, such as trademarks and copyright.

Qualifying persons

Qualifying persons include Cyprus tax resident taxpayer, tax resident Permanent Establishments (PEs) of non-tax resident person as well as foreign PEs that are subject to tax in Cyprus

Qualifying incomes

Qualifying incomes are calculated in accordance with the nexus fraction that follows:

OI X (QE+UE)/OE

i. OI is the overall income derived from the QA,
ii. QE is the qualifying expenditure on the QA
iii. UE is the uplift expenditure on the QA and
iv. OE is the overall expenditure on the QA

In brief, an amount equal to 80% of the qualifying profits earned from qualifying intangible assets will be allowed as a tax deductible expense

Examples with 3 scenario assumptions:

Examples	Assumption Scenario	Qualifying Profit	Deduct 80% of qualifying profits	Effective results to the Corporation Income Tax
1	Qualifying intangible assets exclusively developed from own Company	1,000,000	(800,000)	The Company’s taxable profit reduced 800,000
2	Company purchased a patent and then outsourced further development to non-related party	520,000	(416,000)	The Company’s taxable profit reduced 416,000
3	Company purchased a patent and then outsourced further development to non-related party	0	0	0

ADVANTAGES OF IP BOX REGIME IN CYPRUS

Cyprus IP Box Regime provides an effective tax rate of as low as 2.5% on income earned from IP assets. The comparable rate in its nearest competitors, Belgium about at 4.44%, Hungary at 4.5% and Luxembourg at 5.2%, followed by Netherlands at 7%, France at 10% and United Kingdom at 10%, those countries are far behind Cyprus

Cyprus IP Box Regime applies to a wider range of income compared to other similar European countries schemes, most of which restrict benefits to income from patents and supplementary patent certificates

IP Box Regime schemes of other European counties offer partial exemption of gains on disposal, the exemptions become less attractive for IP holders than those offered by the Cyprus scheme, due to their limitations on qualifying assets and less deduction rates.

Cyprus is an attractive location for the establishment of an IP holding and development company, as it also offers the legal protection by the signatories of all major IP treaties and protocols and EU Member states.

Feel free to contact us for further information.