Introduction
The Intellectual Property (IP) tax regime in Cyprus is fully compliant with international developments in the tax treatment of IP income and OECD’s guidance.
- Under the IP regime, 80% of the qualifying profits generated from the qualifying intangible assets is deemed to be a tax-deductible expense for qualifying taxpayers. Therefore, only 20% of the qualifying profits will be taxed at the rate of 12,5%.
- Where the calculation of qualifying profits results in a loss, only 20% of this loss may be carried forward or group relieved.
- The taxpayer may elect not to claim all or part of the available 80% deduction for a particular tax year.
Qualifying intangible assets
Qualifying intangible asset is defined as an asset which was acquired, developed or exploited by a person in the course of its business, and which relates to IP, excluding IP associated with marketing, and which is the result of research and development (R&D) activities and includes intangible asset for which only economic ownership exists.
Qualifying intangible assets comprise of:
a) Patents as defined in the Patents Law.
b) Copyrighted software programs
c) Other intangible assets protected by law which fall under either (i) or (ii) below:
i. Utility models, intellectual property intangible assets which provide protection to plants and genetic material, orphan drug designations and patent extensions.
ii. Intangible assets that are non-obvious, useful and novel, that are certified by an appropriate authority in Cyprus or abroad, and where the taxpayer satisfies size criteria (i.e., annual IP related revenue does not exceed €7.500.000 for the taxpayer, and a group total annual revenue does not exceed €50.000.000, using a 5-year average for both calculations)
The following assets are specifically excluded from the IP Box regime:
- Trademarks
- Brands
- Business names
- Image rights
- Other intellectual property rights used for the marketing of products and services.
Qualifying taxpayers
Qualifying taxpayers that are eligible for the IP regime include:
- Cyprus tax resident persons
- Domestic Permanent Establishments (PEs) of non-tax resident persons
- Foreign PEs which are subject to tax in Cyprus.
Qualifying profits
Qualifying profits are calculated in accordance with the nexus fraction as described below:
QP = OI X QE + UE
OE
QP = Qualifying Profits
OI = Overall income derived from the qualifying intangible asset
QE = Qualifying expenditure on the qualifying intangible asset
UE = Uplift expenditure on the qualifying intangible asset
OE = Overall expenditure on the qualifying intangible asset
The “nexus approach” provides that there should be sufficient substance and an essential nexus/interconnection between expenses, the IP assets and the related IP income in order to benefit from a new Cyprus patent box regime.
a) Overall income (OI) arising from the qualifying intangible asset is defined as the gross profit from the assets (i.e. gross income less any direct costs, including the capital allowances, for generating such income).
Overall income includes but is not limited to:
- Royalties or any other amounts relating to the use of qualifying intangible asset
- Any amount for the grant of a license for the exploitation of the qualifying intangible asset
- Any amount received from insurance or as compensation in relation to the qualifying intangible asset
- Trading income from the disposal of the qualifying intangible asset (except capital gains). Capital gains arsing from the disposal of a qualified asset are not included in overall income and are fully exempt from income tax
- Embedded income on qualifying intangible asset, which is derived from the sale of goods, the provision of services or use of any procedures that are directly related to the qualifying asset
b) Qualifying expenditure (QE) for qualifying intangible asset is the sum of total R&D costs incurred in any tax year, wholly and exclusively for the development, improvement or creation of qualifying intangible asset and which costs are directly related to the qualifying intangible asset.
Qualifying expenditure includes, but is not limited to:
- Wages and salaries
- Direct costs
- General expenses relating to installations used for R&D
- Commission expenses associated with R&D activities
- R&D expenditure outsourced to unrelated parties
Qualifying expenditure does not include:
- The acquisition cost of intangible assets
- Interests paid or payable
- Cost relating to the acquisition or construction of immovable property
- Amounts paid or payable directly or indirectly to a related person to conduct R&D activities, regardless of whether these amounts relate to cost sharing agreement
- Costs that cannot be shown to be directly associated with a specific qualifying intangible asset
Any expenditure for R&D that has been outsourced to non-related parties, as well as any expenses of a general nature for R&D which cannot be allocated to the qualifying expenditure of a specific qualifying intangible asset, can be apportioned pro rata to the qualifying intangible asset.
c) Uplift expenditure (UE) of a qualifying intangible asset is the lower of:
- 30% of the QE and
- the total acquisition cost of the qualifying asset and any R&D costs outsourced to related parties.
d) Overall expenditure (OE) of a qualifying intangible asset is the sum of:
- QE and
- The total acquisition cost of the qualifying asset and any R&D costs outsourced to related parties incurred in any tax year.
Cumulative nexus fraction
The nexus approach is an additive approach. The calculation requires both that QE includes all qualifying expenditures incurred by the taxpayer over the life of the IP asset and the OE includes all overall expenditures incurred over the life of the IP asset.
For the purpose of calculating OI, direct costs include the following:
- All the direct costs which include all expenditure incurred directly or indirectly, wholly and exclusively, for the production of the overall income from the qualifying intangible asset.
- The deduction which is granted in accordance with the provisions of article 33(5) of the Income Tax Law (relating to deemed interest expense deduction), which is derived from the development or sale of a qualifying intangible asset, is regarded as a direct expense.
- The deduction which is granted in accordance with the provisions of article 9B of the Income Tax Law (notional interest deduction), which is attributable to a qualifying asset, is considered as direct expense for the purposes of calculating the profit.
Accounting records
Any person who claims benefit under the above regime is obliged to maintain proper books of account and records of income and expenses for each intangible asset.
Our Department of Taxation is at your disposal for any information, clarifications, or assistance you may require.