THE CYPRUS IP REGIME

THE CYPRUS IP REGIME

The intellectual property business is a popular activity in Cyprus. The advantages of Cypriot jurisdiction are its low tax rate and reliable legal protection.

The intellectual property regime of Cyprus complies with international European tax requirements for such activities. The IP regime has been tested by the EU Code of Conduct.

Advantages of the Cypriot IP Regime

80% of the profits that fall under the regime are exempt from tax. A corporate tax rate of 12.5% ​​makes an effective tax rate of only 2.5% possible.

Details of the regime

In accordance with the Cyprus IP regime, 80% of the qualifying profit generated by the qualifying assets is considered a tax on expenses for the respective taxpayers.

When calculating qualified profits, the new regime uses the Nexus approach.

In accordance with this approach, the level of profit is positively correlated with the implementation of research and development work on the development of a qualifying asset (OK) in the same company.

Qualification Assets

Qualification assets of the new regime include:

• Patents
• Copyrighted Programs
• Other intangible assets that are not obvious, useful and new. Qualifying assets do not include trademarks and copyrights.

Qualified persons:

• Taxpayers who are tax residents of Cyprus
• Permanent missions of non-residents
• Cyprus taxable foreigners.

Qualifying profits

Qualifying profits are calculated in accordance with the nexus fraction that follows.

OI X   QE + UE

OE

Where:

OI       is the “overall income derived from the QA”

QE      is the “qualifying expenditure on the QA”

UE      is the “uplift expenditure on the QA” and

OE      is the “overall expenditure on the QA”

Overall Income (OI) is calculated as gross income minus any direct costs (including capital premiums) of this asset, i.e. gross profit.

Total revenue includes:

• royalties derived from the use of an intangible asset, trading income from the disposal of a qualifying asset
• embedded income derived from a qualifying asset.

Qualifying Expenditure (QE)

• Salary and wages
• Direct expenses
• Total R&D costs
• R&D expenses transferred to third parties

Uplift Expenditure (UE) is the lower of:

• 30% QE
• QA purchase price

Research and development costs outsourced to third parties.

The overall expenditure (OE) is the sum of:

• Qualification expenses
• Total acquisition costs for quality assurance and any R&D expenses transferred to third parties in any tax year.

Cumulative nexus fraction

A 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 that OE includes all overall expenditures incurred over the life of the IP asset.

Losses from the qualifying assets

Where the calculation of qualifying profits results in a loss, only 20% of this loss may be carried forward or group relieved.

Other intangible assets

Other intangible assets that are used in the business of a taxpayer and do not qualify for the IP regime may still benefit from other provisions of the Cyprus tax law.  In particular, capital allowances and/or national interest deduction (NID) may be available to these assets, which will help reduce the overall effective tax rate of the company.  Examples of such assets include trademarks, copyrights and other intellectual property assets.

Capital allowances

As from July 2016, the capital costs of intangibles (excluding goodwill and qualifying assets as defined in the IP regime) are tax-deductible in the form of capital allowances.  The cost is spread over the useful life of the asset with a maximum useful life of 20 years.

Notional Interest Deduction (NID)

NID may be available on assets introduced in a Cyprus company through equity which are employed in the production of taxable income.

The above information is only a brief description of the provisions of the relevant law up to the date of publication of this Memo and in no way is exhaustive. Further professional advice should be sought for each particular case. Our firm does not accept any responsibility for any loss or damage occurring by acting on the basis of this information. Also, please visit our website for further updates.