What is the Cyprus IP Box Tax Regime?
The IP Box Regime (also known as a patent box, innovation box, or IP box) is a corporate tax regime used by many countries to incentivize R&D activities by taxing revenues derived from licenses, royalties, patents, and the sale or transfer of qualified IP assets differently than other commercial revenues.
Intellectual property (IP) is a widely used term that refers to mind-creation outcomes such as software programs, innovative algorithms and formulas, inventions, trade secrets and know-how, manufacturing practices, marketing concepts, artistic works, any kind of unique designs, unique images, business names, and inventions used in commerce. It is one of the most valuable things a business may have.
The intellectual property assets may not have a fixed geographical location and can be shifted to a Cyprus company without incurring substantial expenditures. 85% of multinational corporations exploit this flexibility to decrease their overall tax burden by transferring important intellectual property to group businesses based in sophisticated IP box jurisdictions.
Main Characteristics of the Cyprus Intellectual Property Box Regime
“The Cyprus IP box regime offers a unique opportunity for companies to strategically locate their intellectual property assets and benefit from a favorable tax environment while promoting innovation and economic growth.”
80% TAX EXEMPTION
of qualifying profit from the exploitation of intellectual property assets
2,5% EFFICIENT TAXATION
For tax purposes, 80% of the profit received through the use of intangible assets is deducted. As a result, only 20% of IP income is calculated after deducting the costs of obtaining the money. Using Cyprus’s corporation tax rate of 12.5%, which is among the lowest in the EU, yields an effective tax rate of 2.5%.
ZERO TAXATION
on gains from the sale of intellectual property assets as capital type transactions\
TAX FREE 0%
The Cypriot House of Representatives adopted a measure revising Section 9(1)(l) of the Income Tax Law on July 17, 2020, introducing a variety of modifications to the tax treatment of intangible assets. In particular, if the sale of intangible assets represents a capital transaction, the subsequent capital gain should not be taxed. The modifications took effect on January 1, 2020, and the requirement to provide a balancing statement upon the transfer or sale of an intangible asset has been eliminated.
20+ YEARS IP ASSETS AMORTIZATION
Up to 20 years amortization period
2% EFFICIENT TAX RATE
Capital expenditures connected to IP acquisition or development may be deducted both in the initial tax year in which the expense was spent and in subsequent years. That is, development or acquisition costs are amortized over a period of up to 20 years. In reality, this can result in an effective tax rate of less than 2%.
Case Scenario (Example):
We have a Company established in Cyprus and deals with the production of Android Games and they are protected under a Copyright. The costs for Developing the Android game were as follows:
Facilities Rent: €15 000
R&D activities outsourced to a Subsidiary Company: €20 000
Salary for Employees in Cyprus: €50 000
R&D activities outsource to Unrelated Company: €30 000
Gross Income from the Game: €500 000
- So according to the Formula above, we need the Qualifying Expenditure first: The Qualifying Expenditure includes everything from the costs above, except the R&D activities outsourced to a Subsidiary Company, so our Qualifying Expenditure is €95 000.
- We need to find the Overall Expenditure, which in that case will be all of the above costs, so the amount or Overall Expenditure is €115 000
- We need the Uplift which is the lower of the following:
a) 30% of the Qualifying Expenditure
b) the total amount paid for the acquisition of the IP asset and the R&D activities outsourced to related parties.30% of Qualifying Expenditure is €28 500 and the total amount of costs of Acquisition of the IP and the R&D outsourced to related parties. In our scenario we didn’t had any costs for acquisition but we had costs for outsourced R&D to related parties which was €20 000. The lower amount for Uplift in that case is option B, thus the Uplift will be €20 000. - The Overall Income is the Gross Income less any direct costs involved in producing that income, in our Case lets use €10 000, as direct costs for Marketing Purposes. That leaves us with an Overall Income of €490 000 (500 000 gross – 10 000 direct costs)
Now its time to Apply the Formula.
Conclusion
Our Qualifying Profit is €490 000 and we are going to Apply 80% Notional Deduction on that amount.
490 000 – 392 000 = 98 000
€98 000 will be taxed at 12,5% Corporate Tax Base.
The tax amount payable is €12 250.
From our Overall Income of €490 000, the €12 250 tax payable is the 2.5%. So we achieved the 2,5% effective tax rate.
If normal taxation would have applied, without the Cyprus IP Box Tax Regime, the payable tax amount would be (490 000 x 12.5%) €61 250.
Our IP Box Services:
- Advising on Tax Efficient Structures
- Registering your Patent, Copyright with National Authorities
- International Tax Planning
- Companies Tax Structures
- Filling IP Box applications
- Registration of Company
- Drafting Licensing Agreements