Cyprus amends Intellectual Property Box Regime

Intellectual property box regimes are special tax regimes used by countries to provide incentives for research and development by taxing patent revenues different than other commercial incomes.

In the Brisbane summit back in September 2014 a proposal was made by Germany and the UK in order to reach an agreement on a single mutual approach to be used by all countries regarding the Intellectual Property (IP box or patent box) regimes. The proposed nexus approach has since then been adopted by the G20 the OECD and the EU. The nexus approach allows the taxpayer to benefit from an IP regime only to the extent that it can show that it has incurred such expenses (e.g. R&D) which increased the IP income. Countries that were inconsistent with the adopted nexus approach had to take the necessary steps to amend their regimes and as of 30th of June 2016 to close their old regimes to new entrants. For these reasons the Cyprus parliament has passed the necessary laws to comply with the new regulations and the nexus approach.

IP box regime in Cyprus and transitional provisions

The existing Cypriot IP box regime that was introduced back in 2012 stated that the 80% of the gross income of the intangible assets was excluded and the remaining 20% was subject to the corporate rate of 12,5%, thus giving an effective tax rate of up to 2,5%. However taxpayers that benefit from the tax scheme will continue to do so until the 30th of June 2021 subject to some conditions regarding the acquisition of assets for the period of 2nd January to 30th of June 2016.

Provisions for the IP assets developed from 1st July 2016

According to the nexus approach all qualifying intangible assets are restricted to patents, computer software and other IP assets which are legally protected and the person that uses them to further his business does not generate an annual gross revenue more than €7.500.000 and for a group of companies the amount of €50.000.000.

It is essential to note that the business names (including brands), trademarks, image rights and other intellectual property rights used to market products and services are no longer considered as qualifying intangible assets.

Qualifying Expenditure is the sum of total expenses for research and development and relief is granted to the taxpayer for any costs incurred on research and development directly linked to the qualifying IP. However the cost of acquiring intangible assets, costs relating towards the purchase or construction of immovable property, interest paid or payable, amounts paid or payable to a related person and costs that cannot be proved as directly connected to a Qualifying IP are excluded and cannot be deemed as qualifying expenditure.

Similar to the previous scheme the 80% of the total profit obtained from the qualified intangible asset is a deductible expense hence maintaining the effective tax rate of less than 2.5% on such income.

Conclusion

The transitional arrangements made ensure that taxpayers benefiting from the previous tax scheme will continue to do so until the 30th of June 2021. In addition while the array of assets and types of expenditure qualifying for relief after the 1st of July 2016 are more limited than before, the new regime is still a very attractive option for taxpayers offering an effective tax rate of up to 2.5% on qualifying income.