Cyprus has come up with an advantageous regulation on of intellectual property (IP) taxation, which is now also fully compliant with international developments pertaining to proper treatment of licensing revenue as well as with the OECD guideline.
Up to 80% of licensing income is tax-exempt. Assuming a corporate tax of 12.5%, this can result in an effective tax burden of merely 2.5%. In the past, this simply applied to all types of IP. Tax benefits were significantly restricted to ensure compatibility with the OECD as well as the EU. According to current law, trademarks and copyrights are no longer covered by the solution. Furthermore, it is also necessary to demonstrate that the intellectual property was in fact created by the Cypriot company.
The advantages do not cover trademarks or copyrights, such as photos or logos!
How does it work?
This calculation must be separately applied to each individual intellectual property. Thus, it is necessary that your accounting consists of separate records for revenue as well as expenses for each individual IP. If this is not possible from an organizational standpoint, grouping may also be possible, at least to a certain extent. You best consult your tax advisor.
The calculation is cumulative. This means that over the lifespan of the IP, for example of a patent, all income as well as cost incurred during that time is included in the calculation. Consequently, this means that the factor will decrease as licensing revenue is generated, while at the same time, no further costs are incurred. The illustration “Nexus Fraction” depicts the development with constant revenue, yet no expenses in the following years, using an initial factor of 100%.
For each tax year, the taxpayer can apply for full, partial or no allowance. Should this result in a loss, only 20% of that resulting loss may be carried forward or passed on to other companies within the corporate group. The illustration “Cumulated Qualified Deductions” shows the cumulative value of the deductions in the event that no use takes place.
Qualified Intellectual Property (QA)
refers to an asset that has been acquired, developed or used by a company to promote its business (other than intellectual property related to marketing) and is the result of research and development activities, including intangible assets, for which only economic property exists.
The provisions of the new IP box regime only apply to:
- patents within the meaning of the patent law,
- computer software and
- other intangible assets that are legally protected and fall into one of the following categories:
- Utility models, rights that protect plants and genetic material, orphan drug names and patent protection extensions
- non-obvious, useful and novel, but only if the annual gross income generated by the company using it to promote a business does not exceed a threshold of € 7,500,000 from all intangible assets (or € 50,000,000 in case of a corporate group of companies). Such assets must be certified by a competent authority in Cyprus or abroad.
Company names (including trademarks), trademarks, image rights and other intellectual property rights used to market products and services are not considered qualified intangible assets.
Overall income (OI)
The overall income refers to the gross income less any direct expenditure of this asset. It includes, among other things, royalties for the use of the intangible asset and trade revenue from sales. Direct expenses are all direct costs incurred while generating income from the IP, including the amortization of any purchase costs of the IP and fictitious equity interest, as well as embedded costs, e.g. license costs for products created using the IP.
Capital gains from the sale of an IP are not included in the overall income and, as a rule, entirely tax-free.
Overall expenses (OE)
Overall expenses are the sum of eligible expenses, total acquisition cost of the property, and research and development costs of related party activities during a tax year.
Qualifying expenses (QE)
Qualifying expenses in this context are the total research and development costs incurred in a tax year as a whole and exclusively for the development, improvement or invention of intellectual property, as well as other costs directly related thereto. They include salaries and wages, direct costs, general expenses related to R&D activities and R&D expenses related to non-associated contractors.
They do not include acquisition costs for intellectual property, interest paid or payable, amounts due to associated contractors for R&D, or costs that are not directly related to a specific intellectual property.
Qualifying profits (QP)
Qualifying profits refer to the part of the revenue to which the tax benefit can be applied. It is determined using the formula
OI * Nexus percentage
The Nexus percentage results from the formula
0.01 * (QE + UE) / OE
Uplift expenditure (UE)
The uplift expenditure refers to whichever is the lesser value of
- 30% of qualified expenditure (QE) or
- the total acquisition cost of the qualified intellectual property plus all R&D costs incurred with associated contractual partners
Have our consultants check whether the IP box in Cyprus can benefit you.