Intellectual Property box regime (IP box) is a special very low corporate tax regime used to encourage research and development by taxing revenues generated by Intelectual Property differently from other commercial revenues. IP boxes have also been used as Base Erosion and Profit Shifting (BEPS) tools, to avoid corporate taxes, a strategy that is subject to special attention from the Organisation for Economic Co-operation and Development (OECD).
On June 2016, The House of Representatives of Cyprus passed amendments to the IP Box tax laws to comply with the provisions of the Action 5 of the OECD's BEPS project and the new EU rules for the tax treatment of profit from the utilisation of Intellectual Property. Therefore today the Cyprus IP Box regime is fully compliant with international developments in the tax treatment of IP income, OECD’s guidance, EU Code of Conduct and with all other relevant standards.
The new provisions apply for assets which are developed after 1 July 2016. Under this regime, 80% of the qualifying profits generated from the qualifying intelectual property assets is deemed to be a tax deductible expense for qualifying taxpayers and thus 20% will be subject to income tax of 12.5%, this brings the maximum effective rate of tax at 2.5%.
In calculating the qualifying profits, the ‘Nexus’ approach is adopted. According to this approach, the level of the qualifying profits is positively correlated to the extent the claimant performs R&D activities to develop the qualifying asset (QA) within the same company.
Qualifying assets (QA) under the new regime include: *
- Patents, as defined in the Patents Law
- Copyrighted computer software programs
- Other protected intangible assets that are non-obvious, useful and novel
Qualifying persons include Cyprus tax resident taxpayers, tax resident Permanent Establishments (PEs) of non-tax resident persons as well as foreign PEs that are subject to tax in Cyprus.
Qualifying profits are calculated in accordance with the nexus fraction which is used to determine the amount of qualifying profits that will give the relevant deduction to the taxpayer.
Where:
Overall Income (OI)
The overall income (OI) is calculated as the gross income less any direct expenditure (including the capital allowances) of this asset, i.e. the gross profit. Overall income includes, but is not limited to, royalties received for the use of the intangible asset, trading income from the disposal of qualifying asset and embedded income earned from the qualifying asset.
Capital gains arising from the disposal of a QA are not included in the overall income and are fully exempt from tax.
Qualifying Expenditure (QE)
The qualifying expenditure includes salary and wages, direct costs, general expenses associated with R&D activities and R&D expenditure outsourced to non-related parties. The QE does not include any acquisition costs of the IP, interest paid or payable, costs relating to the acquisition or construction of immovable property, any amounts payable which cannot be proved directly connected to the specific QA.
Uplift Expenditure (UE)
UE is to be added to the above costs (QE) and which means the lower of: either 30% of the QE, or the total acquisition cost of the QA and any R&D costs outsourced to related parties.
Overall Expenditure (OE)
The overall expenditure (OE) is the sum of the qualifying expenditure and the total acquisition costs of the QA and any R&D costsoutsourced to related parties incurred in any tax year.
Cumulative Nexus fraction
The Nexus approach is an additive approach; the calculationrequires both that QE includes all qualifying expendituresincurred 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.
Illustrative example
Once the nexus fraction is calculated, this will be used to determine the deduction available for each QA, as illustrated in the example below.
|
|
EUR |
|
Revenue |
1.000.000 |
|
Less: Direct expenditure from IP asset |
- 400.000 |
|
Overall income (OI) |
600.000 |
|
Assume nexus fraction of 90% |
|
|
Qualifying profits – 90% (nexus fraction) of OI |
540.000 |
|
Less: 80% exemption on qualifying profits |
-432.000 |
|
Taxable qualifying profits |
108.000 |
|
Remaining OI (10% of OI) – * |
60.000 |
|
Total taxable profit |
168.000 |
|
|
|
|
Tax (12,5%) |
21.000 |
|
Effective tax rate – ** |
3,5% |
* The remaining overall income is added to the taxable qualifying profits and the total is subject to tax at the corporate tax rate of 12.5%
** The effective tax rate can be reduced to 2.5% with a nexus fraction of 100%
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 Notional 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.