Latest News

Introduction and effective date

 On the 14th of October 2016, the Cypriot legislation has been amended in order to align the taxation of the income arising from the use or disposal of intangible assets in accordance with the recommendations of the Organisation for Economic Co-operation and Development (OECD) Action 5 and with the new EU rules. The amendments are effective retrospectively from the 1st of July 2016.

The existing Intellectual Property (IP) Box Regime

During 2012, the IP Box regime was introduced for the first time in Cyprus and covered IP assets defined in the Patents Law, the Trademarks Law and the Intellectual Property Rights Law.

Under the existing IP Box regime, an exemption of 80% of the net profit and gains arising from the use or disposal of the IP assets (gross income after the deduction of all direct costs including amortisation of the cost of the IP asset over a period of five years and interest). In the event of a resulting loss, only 20% of this loss could be carried forward to subsequent years or to be surrendered to other companies within the same Group.

In relation to Cyprus corporation tax, the provisions of the existing IP Box regime allowed for an effective tax of 2,5% after the exemption of 80% as described above. 

Transitional Provisions

The amendments in the legislation include transitional provisions allowing persons who have opted in the existing IP Box regime to continue claiming the benefits until 30th of June 2021 in relation to the following IP assets:

• Existing IP assets that were acquired before the 2nd of January 2016;
• IP assets acquired (directly or indirectly) from related parties, during the period from the 2nd of January to the 30th of June 2016, provided that such IP assets would have been eligible to qualify under the provisions of the existing Cyprus IP Box regime or under a similar regime for IP assets in another state;
• IP assets acquired from a non-related party or developed during the period from the 2nd of January to the 30th of June 2016.

There are also transitional provisions that expire on the 31st of December 2016, for IP assets that were acquired directly or indirectly from related parties during the period from the 2nd of January to the 30th of June 2016 if such assets do not fall within the above provisions of the existing Cyprus IP Box regime or a regime for IP assets in another state.

The New Intellectual Property (IP) Box Regime

As mentioned above, the new legislation that was voted on the 14th of October 2016 contains the rules and conditions which are applicable for IP assets which are developed after the 1st of July 2016.

The new IP Box regime do not provide a change in the effective corporation tax rate of 2,5%, that is provided under the existing IP Box regime. Moreover, the new IP Box regime focuses on the application of the modified “nexus approach” for the calculation of the amount of qualifying income, expenditure and resulting profit that the 80% exemption will be applicable, the narrowing down of the definition of what is a “qualifying” IP asset as well as guidelines for maintaining proper books and accounting records by the taxpayers. 

Qualifying IP assets

A qualifying IP asset is an asset that was acquired, developed or exploited by a person (excluding IPs associated with marketing) in advancement of its business and which is the result of research and development activities and includes intangible assets for which only economic ownership exists.  Qualifying IP assets are restricted to Patents, Computer Software and IP assets which are nonobvious, useful and novel and from which the income of the Company does not exceed (in a 5 year period) €7,5m per annum (€50m in case of a Group). 

Trademarks including brands, image rights, business names and other intellectual property rights used for the marketing of products or services do not qualify as a qualifying IP asset. 

Moreover, according to the new regulations, IP assets must be certified by a relevant authority either in Cyprus or abroad.

Qualifying income

Qualifying income includes, but is not limited to the following:

• Royalties or amounts received for the use of a qualifying asset;
• License fee for the operation of a qualifying asset;
• Any insurance compensation received relating to a qualifying asset;
• Revenue from the disposal of a qualifying asset.

Qualifying expenditure

The definition of a qualifying expenditure includes the research and development costs incurred wholly and exclusively for the development, improvement or creation of a qualifying asset in a tax year. These costs need to be directly related to the qualifying asset and include, but are not limited, to the following:

• Direct costs (including amortisation of the intangible and notional interest on equity that was contributed in order to finance the development of a qualifying asset);
• Wages and salaries; 
• Expenses related to research and development installations and supplies;
• Research and development costs outsourced to unrelated parties, excluding:
  • Cost for the acquisition of IP assets or immovable properties;
  • Interest expense;
  • Expenses paid to related parties for R&D activities;
  • Costs which cannot be proved to be directly related to a qualifying asset.

Research and development costs outsourced to related parties are not considered qualifying expenditure.

In addition, the new amendments provide for a maximum 30% up-lift of “qualifying expenditure”, thus allowing qualified taxpayers to include all or part of non-qualifying research and development costs to be included as part of the “qualifying expenditure”.  The up-lift of “qualifying expenditure” is defined as the lower of:

• the 30% of the qualifying expenditure, and
• the total acquisition cost of the qualifying asset plus any research and development costs outsourced to related parties

Qualifying profits

“Qualifying profits” are calculated based on the OECD recommended ‘’nexus approach” according to which there should be sufficient substance and an essential nexus between the expenses, the IP assets and the related IP income in order to benefit from a patent box regime. This approach limits application of the IP Box regime if research and development (R&D) is being outsourced to related parties.

As per the new IP Box regime, 80% of the qualifying profits as these are calculated using the ratio below are deemed to be a tax deductible expense.

Qualifying profits =   Qualifying expenditure + Uplift expenditure     X    Overall income 

                                                           Overall expenditure incurred

A taxpayer may elect every year not to claim the deduction or only claim a part of it. In the case of a resulting loss, only 20% of the loss can be surrendered to other group companies or be carried forward to subsequent years.

Overall Income

The Gross profit arising from the use or disposal of a qualifying asset, less all direct costs incurred for generating such an income.  Gains on the disposal of a qualifying asset do not fall within the scope of the definition of overall income and are fully exempt from corporation tax.

Overall Expenditure

The total of any expenditure falling within the qualifying expenditure definition above, and the total acquisition cost of the qualified assets and any research and development costs outsourced to related parties incurred in any tax year.

Accounting Records

The taxpayers who wish to claim the above benefits should ensure that proper books of account and records of income and expenses must be kept for each intangible asset.

The above provisions can be applied by taxpayers that are Cyprus tax residents, permanent establishments (PE) of non-tax resident persons, as well as a foreign PE which are subject to tax in Cyprus.

How CosmoCo can assist you:

The above changes in IP Box regime have a direct impact on existing and new structures. CosmoCo tax experts can assist you to review and evaluate your existing or new IP structures and ensure that they are in line with the applicable law.