IP Box Regime Revisited

IP Box Regime Revisited

Cyprus has always been keen to provide a competitive edge for business activities on a global scale and to this effect, Cyprus has ensured that it can provide an attractive regime to benefit one of the most valuable assets of any business, its Intellectual Property. As such, Cyprus offers a beneficial tax rate and is also legally supported by the EU Member States and the signatories of all major IP treaties and protocols.

The Intellectual Property (IP) Box regime, which is also referred to as the Patent Box sometimes, offers a comprehensive and attractive low corporate tax regime, with the main aim being to encourage research and development activities, which result in lower taxes, by taxing revenues deriving from a license, sublicense, sale or transfer of qualified IP assets.

Cyprus has also strengthened its legislation relating to the registration and protection of IP rights to be fully aligned with European Union standards, maximizing the protection offered to the owners of the Intellectual Property.

What is Defined as Intellectual Property?

The term ‘Intellectual Property’ includes any mind creations, such as software programs, innovative algorithms and formulas, inventions, trade secrets and know-how, manufacturing practices, marketing concepts, artistic works, designs, images, names and inventions used in commerce.

Can I transfer my Intellectual Property ownership rights to Cyprus?

In short, yes. IP assets can be easily and conveniently relocated or transferred between different jurisdictions and tax systems due to their non-physical character. Such transfers can also occur with no significant costs. Recent and ongoing discussions have indicated that almost all major global companies use this flexibility to reduce overall taxes by allocating valuable IP to companies in countries with advanced IP box regime such as Cyprus.

Major Types of IP Box Regimes

Currently, these can be said to be separated into two main categories, as follows:

  1. Reduced rates of taxes on qualifying income (implemented by France, Netherlands, and the UK)
  2. An exemption of a specified proportion of revenues (implemented by Cyprus, Spain, Luxembourg, Belgium and Hungary)

Cyprus’ Old IP Box Regime

Although the definitions and benefits of this IP Box Regime are no longer offered for new registrations of IP rights, there are still cases which, under specific circumstances, can still fall within these “old” rules and regulations. As such, it remains important to refer to them and double-check as to their applicability prior to moving forward. The first Cyprus IP Box regime was introduced in 2012 and can still apply, in several cases, until 30/06/2021.

It covers the intellectual property assets in accordance with

  • the Patents Law,
  • the Trade Marks Law and
  • the Intellectual Property Rights Law.

Benefits of the Cyprus IP Box Regime

  • 80% deduction of profits on disposal of IP rights(a generous exemption compared to other regimes)
  • 80% (four-fifths) deduction of revenue from the exploitation of IP rights– so only 20% of IP income after the deduction of the costs of earning the income is taken into calculation. [e.g. when applying the Cyprus corporate tax rate of 12.5% which is amongst the lowest in the EU, provides the effective tax rates of 2.5%]
  • 5-year amortization period – capital expenditure related to IP acquisition of developmentmay be deducted in the first tax year in which the expense was incurred as well as in the subsequent 4 years. This, in practice, can lower the effective tax rate to less than 2%.

The New Cyprus IP Box Regime

In 2016, the House of Representatives in Cyprus ratified amendments to the Income Tax Laws to bring the national legislation on the taxation of income from Intellectual Property assets in alignment with the provisions of the OECD BEPS Action 5 and the new EU rules. The new provisions apply for IP assets which are developed after the 1st of July 2016.

New Definitions:

A qualifying intangible asset

A qualifying intangible asset is an intellectual property asset which was acquired, developed or exploited by a person in furtherance of his business, (excluding such property associated with marketing) and which is the result of research and development activities and includes intangible assets for which only economic ownership exists.

Those assets are patents as defined in the Patents Law, computer software, other IP assets which are legally protected, and they fall under one of the following: 

  1. utility models, intellectual property assets which provide protection to plants and genetic material, orphan drug designations and extensions of protections for patents; or
  2. nonobvious, useful, and novel, where the person which utilizes them in furtherance of a business does not generate annual gross revenues exceeding €7.500.000 (in case of a group of companies not exceeding €50.000.000), which are certified as such by an Appropriate Authority in Cyprus or abroad.
  3. Business names (including brands), trademarks, image rights and other intellectual property rights used to market products and services are not considered as qualifying intangible assets anymore.

A Qualifying Expenditure

Qualifying expenditure is the sum of total research and development costs incurred in any tax year, wholly and exclusively for the development, improvement or creation of qualifying intangible assets and which costs are directly related to the qualifying intangible assets. It includes, but is not limited to, wages and salaries, direct costs, general expenses relating to installations used for research and development activities, costs associated with research and development that has been outsourced to non-related persons.

However, the term does not include cost for the acquisition of intangible assets, interest paid or payable, costs relating to the acquisition or construction of any immovable property, amounts paid or payable directly or indirectly to a related person to conduct research and development activities, regardless of whether these amounts relate to cost-sharing agreements and costs which cannot be proved directly connected to a specific eligible intangible asset

Uplifting Expenditure

Up-lifting expenditure will be added to the above costs, which means the lower of:

  • 30% of the eligible costs, or
  • the total amount of the cost of acquisition and outsourcing to related parties for research and development in relation to the eligible intangible asset.

Qualifying income

Qualifying income is the proportion of the overall income corresponding to the fraction of the qualifying expenditure, plus the uplifting expenditure over the total expenditure incurred for the qualifying intangible asset.

Overall expenditure

Overall expenditure is the total capital expenditure, qualifying or not, relating to the creation of the IP.

Overall income

Overall income is the gross income in a tax year less the direct costs incurred to produce the income. Income includes, but is not limited to:

  • royalties or other amounts in connection with the use of qualifying intangible assets
  • any amount for a license for the operation of qualifying intangible assets
  • any amount received from insurance or as compensation in relation to the qualifying intangible asset
  • capital gains and other income from the sale of qualifying intangible assets
  • the embedded income of qualifying intangible asset arising from the sale of products by using procedures that are directly related to this item

Direct costs

Direct costs include:

  • all direct and indirect costs incurred in earning the income from the qualifying intangible assets
  • the amortization of the cost of the intangible assets
  • notional interest on equity contributed to financing the development of the qualifying intangible asset.

As a general note, the owners of the IP rights have to maintain proper and up to date accounting books and records of their income, expense and profit and loss, in order to be able to claim the benefit of each intangible asset under the new IP Box Regime in Cyprus.

Transitional Period between Old and New IP Box Regime

Transitional provisions are in force for persons who have registered their IP assets before the implementation of the new IP Box regime, enabling them to continue benefiting from the old IP Box Regime until 30 June 2021. Such provisions apply to IP assets which:

  • were acquired before 2 January 2016; or
  • were acquired directly or indirectly from a related person during the period from 2 January 2016 until 30 June 2016, and which IP assets at the time of their acquisition were benefiting under the IP Box regime or under a similar scheme for intellectual property assets in another state; or
  • were acquired from an unrelated person or developed during the period from 2 January 2016 until 30 June 2016.