The Cyprus IP Box Regime’s Actual Tax Rate at Just 2.5%
On the 14th of October 2016, the House of Representatives approved legislative provision amendments to the current Income Tax Law whereby the new amendments will correlate the Cyprus IP Box regime (taxation of royalties) with the OECD and are effective as from 30th of June 2016.
The recent tax legislative amendments brings solidity when reckoning taxation on royalties and facilitates investors to more accurately forecast their future tax projections. Furthermore, the new legislation, under specific circumstances, provides the opportunity for those who are benefiting from the old IP box regime to be able to extend their current structure in order to continue to benefit until the end of June 2021.
The amendments to the Income Tax Law falls in line with the '"nexus approach" which is deliberated within the ‘Agreement on Modified Nexus Approach for IP Regimes’ under the Base Erosion and Profit Shifting Project between the OCED and the G20. The “modified nexus approach” states that in order to qualify for the IP box regime, adequate substance is required and there should be a clear connection between business operating expenses, the IP assets and the related IP income. In other words, a taxpayer can benefit from the provisions of a particular IP tax regime if IP income is generated through incurred research and development (R&D) expenditures.
The Cyprus IP Box Regime
The IP Box regime provides for an exemption from taxation of 80% of the gross royalty income of intangible assets after the deduction of costs such as direct running expenses, interest expense and remuneration.
In other words, 80% of "Royalty Profit" accumulated from Qualifying IP Rights were regarded at expenses by the Cyprus tax authorities. The Cyprus corporate income tax rate at 12.5% would typically apply to the 100% of net profits generated, however, after the applicable IP Box regime tax exemptions, only 20% of the profits are taxed, reaching an actual corporate tax rate of 2.5%, thus making it the lowest tax rate IP box regime in Europe. Furthermore, in the circumstance of a tax loss, 20% of the loss could be surrendered to an associated group company or be extended to the next year/s financials.
The Old IP Box Regime: Qualifying Intangible Assets
The previous Cyprus IP Box regime was applicable to Qualifying IP Rights defined and regulated by the Patents Law, the Trade Marks Law and the Intellectual Property Rights Law in 2012. For a Cyprus IP Holding Company to qualify under the IP Box Regime 's tax provisions it must have been the proprietor of the Qualifying IP Right through a Cyprus IP Holding Company and utilise the Qualifying IP Right for the production of taxable income.
The amended legislation contains transitional provisions which propose that those who have already taken part in the Cyprus IP box regime will be provided with the right to claim benefits from the said legislation until the 30th of June 2021.
Such transitional provisions are applicable to:
Intellectual Property acquired before 2 January 2016;
Intellectual Property that was acquired directly or indirectly from a related person during the period 2 January 2016 to 30 June 2016 but at the time of acquisition these intellectual property rights were enjoying the benefits of the Cyprus or other IP box regime;
Intellectual Property that was acquired from an unrelated person or that was internally developed during the period from 2 January 2016 to 30 June 2016;
There are transitional provisions to continue to apply the IP box provisions for acquisitions from related parties made during the period 2 January 2016 to 30 June 2016 up to 31 December 2016.
New IP Box Regime Reform: Qualifying Intangible Assets
The new legislation has been in effect and applicable to those acquiring and developing intellectual property after the 1st of July 2016.
The new IP box regime considers intangible assets qualifiable if they are:
Acquired, developed or used by an natural or legal person in the course of business (exclusive of IP related to marketing).
Is the outcome of R&D
Whereby only economic ownership exists for the following intangible assets:
Patents as defined in the Patents Law are:
Additional IP assets that may be subtle in nature, advantageous and original, whereby the person which exploits them in the course of business growth and does not generate annual gross revenues exceeding Euro 7.500.000 (in case of a group of companies not exceeding Euro 50.000.000)
Additionally, under the new regime, business names (including brands),trademarks, image rights and other intellectual property rights used for marketing purposes shall no longer be deemed as a Qualifying Intangible asset.
The well-organized IP tax regime of Cyprus in combination with the EU legislative protection through key treaties and conventions is what makes Cyprus a flourishing international business hub for the acquisition and creation of IP assets. Even though Cyprus House of Parliament amended the current IP legislation to conform with the OECD, it is believed that Cyprus will retain its tax competitive advantage against other European Member Countries.
Taking into consideration the overall advantages that the Cyprus tax system offers to international entities, it is highly possible that even more companies will decide to relocate their IP activities to Cyprus. Correspondingly to IP protection, Cyprus’ extensive compilation of international double tax treaties significantly reduced foreign withholding taxes on royalty income to just 2.5% marking it the lowest IP Box regime in Europe.