CYPRUS IP BOX REGIME TAX BENEFIT
Cyprus continues to be an attractive destination for business investment opportunities as well as tax planning advantages within the framework of the Intellectual Property Law of Cyprus.
A number of global ICT companies have chosen Cyprus as a hub for software development, system integration, testing services, disaster recovery, research and development activities, project management, and marketing and sales.
The Cyprus IP Box Regime, also called Patent Box or Innovation Box, was introduced in 2012 and offers technology companies the potential of an effective tax rate of 2,5% on profit resulting from exploitation of their intellectual property, such as computer software, patents, licenses, royalties and other intangible assets. This combined with the country’s continuous compliance with EU, OECD, and WIPO standards, set Cyprus at the top of the international IP regimes.
With over 65 double tax treaties and 0% withholding tax on dividends in combination with only 2,5% tax on royalties received – in contrast to Belgium at 4,44%, Hungary at 4,5%, Luxembourg at 5,2% and Netherlands at 7% – Cyprus is considered an excellent choice for software developing companies.
If disposal of intangible assets is a capital nature transaction, then the resulting capital gain should not be taxable. The obligation to prepare a balancing statement upon a transfer or sale of an intangible asset is abolished.
Capital expenditure related to IP acquisition or development may be deducted in the first tax year in which the expense was incurred as well as in the subsequent years. This in practice can lower the effective tax rate to less than 2%.
When implemented the IP Box can result an amount equal to 80% of the qualifying profits earned from qualifying intangible assets (QA) allowed as a tax-deductible expense. Taking into account that Cyprus applies a corporate tax rate of 12,5% on profit, the IP Box regime can result in an effective tax rate as low as 2,5%.
In calculating the qualifying profits, the new regime applied from 1st July 2016 adopts the “nexus” approach. 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 QA within the same company.
Qualifying assets under the regime include: patents, copyrighted software programs, and other intangible assets that are non-obvious, useful and novel. Qualifying assets do not include trademarks, copyrights, image rights and any other IPs relating to marketing.
Taking into consideration the tax treatment of royalties, the legal and business environment of the country, there is no doubt that Cyprus is the ideal IP Holding jurisdiction. Investors who wish to set up an IP Holding Company should seriously consider Cyprus as the vehicle that allows proper protection of the IP Rights and provides all the tools for efficient investment planning.
Our legal team assists international businesses to take advantage of the favourable Intellectual Property Law of Cyprus and start maximizing their benefits. Contact us to get more details.