In our article “A Step by Step guide for forming a Company in Cyprus” published in August 2017 we demonstrated to the reader a detailed approach of the benefits and procedure to be taken in setting up a Company in Cyprus. In continuation to this article we decided to provide a further analysis of the benefits surrounding a Cyprus Holding Company. As a result of questions raised by various prospective clients today we shall tackle the tax regime of a Cyprus Intellectual Property organization.
Under the Cyprus Tax legislation on Royalties effected in 2012 (IP Box Regime) Companies were allowed to have certain tax advantages as long as they were part of the qualified Intellectual Property (IP) rights with the condition that they were acquired/ developed before January 2012. Qualifying IP rights included but were not exhausted to copyrights, registered patents and trademarks, artistic or literal works, software etc. It should be noted that for IP rights registered outside the Republic of Cyprus, a Cyprus Company could still benefit from the IP Box Regime.
The IP Box Regime legislation was applicable to IP Companies until the 30th of June 2016. Between the foresaid period and 30 June 2021 only existing registered IP Box Companies will continue to enjoy the “fruits” and be able to apply the tax regime. The IP Box regime as described above was heavily investigated and finally terminated for both Cyprus and other countries after pressures were exercised from the Organization for Economic Co-operation and Development (OECD) and the Economic and Financial Affairs Council (ECOFIN).
NEW CYPRUS IP BOX – COMPLYING WITH BEPS ACTION 5
Nevertheless, Cyprus has introduced since 1 July 2016 (for intangible assets owned or developed after 1 July 2016 by the Cyprus Company on its own name in the Republic of Cyprus or abroad) a new IP Box Regime complying with OECD requirements and effectively remaining an ideal location for registering an IP or Research and Development (R&D) Company.
- Qualifying intangible assets: While the previous law was providing a very general definition now the revised law has excluded business names, brands, trademarks, image rights and other intellectual property rights used within the scope of marketing products and services and identifies a “qualifying intangible asset” as an asset which was acquired, developed, or exploited by a person to carry out/ enhance/ initiate a business being a result of R&D activities. Examples of these assets are patents (as these are provided by the Patents Law), computer software and other IP assets which are per law non-obvious, useful and novel. For the above to apply and to be able to exploit the asset the person or group must not generate more than Euro 7.5 million or Euro 50 million respectively.
- Qualifying profits: In real terms qualifying profits are derived by multiplying the overall income (of qualified asset) of the Company by the qualifying expenses (directly related to the qualifying asset) plus any uplift expenditure over the overall expenses of the business expenditure incurred specifically for the qualified intangible asset.
- Overall income: Under the revised law 80 of the income earned from the qualified intangible asset is considered to be a deductible expense.The income earned from the qualified intangible assets may be but not limited to, royalties arising from the usage of a qualified intangible asset, income from selling a qualifying intangible asset and license revenue from operating the qualified intangible asset.
- Qualifying expenditure: Under the new regime qualified expenditure refers to all costs (R&D costs) occurring throughout the year wholly and exclusively for developing/ improving/ creating a qualified intangible asset. Examples of qualified expenditure include direct costs, wages and salaries, general expenses arising from installations used for R&D, various expenses associated with the supplies of R&D material etc. It should be noted that expenses related to acquisition of intangible assets or construction of immovable property, interest paid, and costs that took place for R&D and cannot be adequately substantiated are strictly prohibited as qualified expenditure and are excluded.
By introducing the revised IP box regime Cyprus has complied with OECD requirements and together with the extensive network of double tax treaties has established itself as an attractive location for registering an IP or Research and Development (R&D) Company in the Republic of Cyprus.