Cyprus has established itself as a highly competitive jurisdiction for intellectual property (IP) management through its attractive IP Box Regime. Designed to promote innovation and research and development (R&D), the regime offers substantial tax benefits for businesses developing or exploiting qualifying IP assets. With an 80% deduction on qualifying profits, only 20% of the IP income is taxed at the standard corporate rate of 12.5%, resulting in an effective tax rate as low as 2.5%. This makes Cyprus one of the most favorable locations in the EU for IP-related business activities. This article outlines the key aspects of the Cyprus IP Box Regime, including eligible assets, qualifying expenditures, and tax advantages, demonstrating why it remains a compelling choice for businesses seeking to optimize their IP strategies.
The new Cyprus IP Box Regime provides the following rules for intellectual property assets developed after 30 June 2016:
1. Qualifying intangible assets of the Cyprus IP Box Regime
“Qualifying intangible asset” means an intellectual property asset which was acquired, developed or exploited by a person in furtherance of his business, (Not including intellectual property associated with marketing) and which is the result of research and development activities and includes intangible assets for which only economic ownership exists.
The Assets mentioned above include among others the:
- patents as defined in the Patents Law
- computer software
- other IP assets which are legally protected and they fall under one of the following: (i) utility models, intellectual property assets which provide protection to plants and genetic material, orphan drug designations and extensions of protections for patents (ii) nonobvious, useful, and novel, where the person which utilizes them in furtherance of a business does not generate annual gross revenues exceeding Euro 7.500.000 (in case of a group of companies not exceeding Euro 50.000.000), which are certified as such by an Appropriate Authority in Cyprus or abroad.
- Business names (including brands), trademarks, image rights and other intellectual property rights used to market products and services are not considered as qualifying intangible assets anymore.
2. Qualifying expenditure of the Cyprus IP Box Regime
“Qualifying expenditure” for qualifying intangible asset is the sum of total research and development costs incurred in any tax year, wholly and exclusively for the development, improvement or creation of qualifying intangible assets and which costs are directly related to the qualifying intangible assets
Qualifying expenditure includes, but is not limited to, the following:
- wages and salaries;
- direct costs;
- general expenses relating to installations used for research and development;
- expenses for supplies related to research and development activities;
- costs associated with research and development that has been outsourced to non- related persons
- but do not include:
- cost for the acquisition of intangible assets;
- interest paid or payable;
- costs relating to the acquisition or construction of immovable property;
- amounts paid or payable directly or indirectly to a related person to conduct research and development activities, regardless of whether these amounts relate to cost sharing agreement;
- costs which cannot be proved directly connected to a specific eligible intangible asset.
- Up-lift expenditure will be added to the above costs, which means the lower of:
- 30% of the eligible costs, or
- the total amount of the cost of acquisition and outsourcing to related parties for research and development in relation to the eligible intangible asset.
3. Qualifying income of the Cyprus IP Box Regime means the proportion of the overall income corresponding to the fraction of the qualifying expenditure plus the uplift expenditure over the total expenditure incurred for the qualifying intangible asset. Income includes, but is not limited to the following:
- royalties or other amounts in connection with the use of qualifying intangible asset;
- any amount for a license for the operation of qualifying intangible asset;
- any amount received from insurance or as compensation in relation to the qualifying intangible asset;
- capital gains and other income from the sale of qualifying intangible asset;
- embedded income of qualifying intangible asset arising from the sale;
- of products or by using procedures that are directly related to this item.
4. Overall Profit of the Cyprus IP Box Regime arising from the qualifying intangible asset means the gross income accrued within the tax year, less the direct costs for generating such income.
5. Direct costs of the Cyprus IP Box Regime
- all direct and indirect costs incurred in earning the income from the qualifying intangible asset;
- the amortization of the cost of the intangible;
- notional interest on equity contributed to finance the development of the qualifying intangible asset.
6. Calculation of taxable profit of the Cyprus IP Box Regime
80% of the overall profit derived from the qualifying intangible asset is treated as deductible expense. Every year the taxpayer may elect not to claim the whole or part of this allowance. In the case of a resulting loss, only 20% of the loss can be surrendered to other group companies or be carried forward to subsequent years.
If you would like more information about how GCPLAW can help you, feel free to contact:
Emilios Koulountis, Manager of the Corporate Department, emilios@gcplaw.com.cy
This article does not constitute a legal opinion or advice. It is merely for educational purposes. Independent legal advice should be obtained from experts, particularly with regards to the relevant laws of other jurisdictions.
