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A. What is the IP Box Regime? - An Introduction
Intellectual Property (IP) is a term used to describe intangible property which are mind creations such as patents, software programs, formulas, inventions, copyright, trademarks and other.
IP Box Regime is a corporate tax regime fully compliant with international development following the guidance of IP income and OECD on tax treatment. This regime has been assessed and approved and is fully compliant with EU standards and directives.
Legislation
The tax legislation entails that an 80% deemed deduction will be granted on “qualifying profits” arising from a “qualifying IP asset”. The determination of a qualifying asset and qualifying profits in this respect is described herein below.
Further, where losses are generated instead of qualifying profits, only 20% of such losses will be eligible to be surrendered via group relief and/or carried forward to subsequent years (maximum of 5 years).
It is important to note from the outset that the IP Regime in Cyprus adopts the principle of the modified nexus approach (“MNA”) as adopted by OECD. The overall linking of expenditure with the accruing of income is instrumental in the application of the MNA.
Qualifying IP Asset
The term “qualifying IP asset” means an asset acquired, developed or exploited by any person in the course of carrying on a business which is (i) intellectual property, other than marketing-related intellectual property and (ii) which is the result of R&D activities.
Qualifying IP assets include the following:
a) Patents, as defined in the Cyprus Patent Law 16 (I)98, as amended;
b) Computer software programs; and
c) Other intangible assets that are non-obvious, useful and novel where the taxpayers do not themselves earn more than €7.500.000 per year in gross revenues from all intangible assets and for those belonging in a group, the global group-wide turnover does not exceed €50.000.000, using a 5-year average for both calculations
Qualifying IP assets do not include trademarks including brands, image rights and other intellectual property rights for the marketing of products or services.
Qualifying IP Profits
“Qualifying profits”, for which the taxpayer will be entitled to benefit from the 80% deemed deduction are calculated in accordance with the following formula (the nexus ratio):
Qualifying Expenditure (QE)
The term “Qualifying Expenditure” in relation to a qualifying IP asset, is the R&D expenditure incurred during a tax year, wholly and exclusively for the development, improvement or creation of a qualifying IP asset and it is directly related to that qualifying IP asset.
Furthermore, R&D expenditure relating to the outsourcing of R&D activities to unrelated parties, as well as expenditures for general and speculative R&D which cannot be included in the qualifying expenditures of a specific IP asset to which they have a direct link, can be divided pro rata across the qualifying IP assets.
Qualifying expenditures can be included in the nexus calculation at the time they are incurred, regardless of their treatment for accounting or other tax purposes.
Up-lift Expenditure (UE)
The relevant legal provisions permit an “up-lift” of the qualifying expenditures incurred by a qualifying taxpayer.
More specifically, the up-lift will be the lower of:
a) 30% of the qualifying expenditure; and
b) The aggregate amount of the acquisition and outsourcing costs to related parties which relate to a qualifying IP asset.
Overall Expenditure (OE)
The term “Overall expenditure”, means qualifying expenditure, acquisition costs and outsourcing costs to related parties which relate to a qualifying IP asset at the time they are incurred.
Overall Income (OI)
“Overall income” means the gross income that is derived from a qualifying IP asset in a tax year after the deduction of any direct expenses incurred wholly and exclusively for the production of such income.
Tracking of Income and Expenditure
Taxpayers are required to maintain books and records in relation to income and expenditure per qualifying IP asset so as to track expenditure and income to ensure that the income receiving benefits did, in fact, arise from the qualifying expenditure incurred.
Amortization
Any expenditure for the acquisition or development of an IP asset incurred by a person engaged in business, provided that such expenditure is of capital nature is amortized over the duration of the useful economic life of the asset; up to a maximum of 20 years or over a period agreed with the Commissioner of Taxation and constitutes a direct expense.
Tracking and segregation of IPs
Since the Cyprus IP Regime uses the nexus approach between expenditures and income it is therefore of major importance that the taxpayers that wish to benefit from it, must track expenditures, IP assets and income. The reasoning behind this is to ensure that the income receiving benefits did in fact arise from the expenditure that qualified from those benefits.
In addition, tracking and segregation of IPs must also ensure that taxpayers have not manipulated the amount of overall expenditures in a way that inflates the amount of income that may benefit from the regime. The client will need over the time of the development, creation and the benefit of the IPs, track the link between expenditure and income while providing evidence to the Cyprus Tax Department.
B. Why Cyprus? The Epitome of Jurisdictions for IP Holding
The Cyprus Business Environment
On several occasions, major business networks and organisations across Europe and other international jurisdictions have recognized Cyprus as being amongst the most attractive European business hubs. Cyprus is well-known for its stable tax legal framework, the consistency in interpreting its tax legislation and its favourable tax rates.
Cyprus –an ideal gateway to Stability, Security, Prosperity and Success
Transparent legal and regulatory environment, high standards of transparency, excellent accounting/legal/banking professional services infrastructure…
Cyprus scores high on all the aforementioned incentives. It is considered as a reputable, competitive, trust-worthy financial business centre for the worldwide operations of multinational corporations. Additionally, it is complemented as being one of the most prime international competitors in the field of holding regimes.
The island is proudly a member of the White list of O.E.C.D. and it is in full compliance with the code of Conduct for Business Taxation and against harmful tax competition. Furthermore, the island is always in line with the latest EU standards.
Reputation and stability
Cyprus joined the European Union in 2004, and together with the advantages of a common European market and the benefits of the Euro currency it adopted in 2008, the country has shown determination in ensuring macro-economic stability, low inflation and low interest rates. Cyprus participates in the EU’s internal market that implies free movement of goods, services and capital. In other words, there are no legal restrictions to European citizens who wish to visit Cyprus, conduct business or live there.
Strategic location
Located in the eastern Mediterranean, at the crossroads of three continents, Cyprus is the link between Europe, Africa and Asia. Just a one-hour flight separates Cyprus from Athens, Cairo and Tel-Aviv and it barely takes three hours to reach Dubai and Moscow and one extra hour till the London financial centre.
Relocation of Directors & Employees
Cyprus as an International Business hub with an advantageous tax system and accompanied by its strategic location is an ideal jurisdiction to create real economic substance and create necessary roots for any business.
The Republic of Cyprus as an initiative to encourage international businesses to set up their headquarters provides for special residence and work permits for non-EU staff of “Companies with Foreign Interest” that have no restrictions in regards to the duration of work and residency permits.
At the same time Cyprus ranked among the top EU countries with respect to university graduates. The workforce in Cyprus is highly educated and arguably tailormade to support the islands business driven market.
For more information you may refer to our publication “Cyprus Work and Residence Permits (Updated)".
Legal system
The legal system in Cyprus is based on a combination of EU law and common law by reason of EU membership and historical links with the United Kingdom, respectively.
The Cyprus company law and other business laws find their origins in the laws of the UK and have been updated for modern business practices as well as harmonised with subsequent EC Directives.
International business people are quickly familiar with the legal and commercial structure of Cyprus and find it to be very enabling in their operations in Cyprus.
At the same time Cyprus meets all the requirements and standards of The World Intellectual Property Organization (WIPO) and the European Union Intellectual Property Office (EUIPO) which means that it has some of the best tools available globally to sufficiently protect IPs
Cyprus’ Advantageous Tax System
Cyprus is an ideal location for any international business seeking a tax efficient jurisdiction.
The island’s advantageous tax system has all the features expected from an international financial centre. Its tax legislation and its regulatory framework are straight forward, business community-tax authority relations are excellent and taxation of the commercial and financial sector is conducted efficiently.
Cyprus’ efficient and transparent tax environment strengthens Cyprus’s competitiveness and makes it an attractive jurisdiction for business operations.
IP Specific Tax Advantages
Other than the specific provisions of the IP Box Regime, an IP Holder can benefit from other tax incentives Cyprus has to offer:
1. Royalties
Whenever a licensee (the client) makes royalty payments to the licensor (Ip Holder) the residence jurisdiction of the licensee may utilize withholding tax on the royalty payment amount and make appropriate deductions. If the licensor is established in Cyprus it has an array of choices to minimize his tax liabilities in regards to withholding taxation of royalties:
A. Utilization of Double Tax Treaties- Cyprus has an extensive network of Double Tax Treaties of which ultimate provides the IP Holder with the ability to take advantage of reduced withholding tax rates. However, to be able and effectively enjoy the benefits of the Double Tax Treaties the IP Holder needs to be a tax resident in Cyprus and therefore a robust tax planning needs to be implemented.
B. EU Interest & Royalty Relief Scheme- Based on the provisions of the EU Interest and Royalty Directive there are no withholding taxes on interest & royalties paid between licensee and licensor if both parties are residents in an EU member state
C. Unilateral Tax Relief- In cases where the aforementioned tax reliefs do not provide sufficient protection the IP holder may elect to claim a unilateral tax relief
2. Dividends
Cyprus Tax Law provisions state that any dividends payable from a resident company to a non-resident or a Cyprus but non-domicile tax resident is not subject to any withholding tax.
C. Cyprus IP Holding Company
To choose a jurisdiction to create a Holding Company for a group of companies or for holding of investments and/or property is not an easy task, as an increasing number of European countries have been introducing holding company regimes, making it difficult for multinational group to make their pick. Tax differences have become a very significant factor in strategic decisions; thus, investors opt for the investment structures with the least tax leakage.
Recent developments and pressure from the EU and the OECD have led many international business centres to change their regulations and legislation to adopt actual substance requirements. This is not a new trend but it is the outcome of a decade-long global enforcement to tackle and eliminate tax evasion.
Therefore, a prudent investor wishing to establish an IP Holding company needs to take into account the global tax, substance and transparency trends and understand that a simple set-up of a Cyprus limited company might not be adequate to enjoy the full benefits the jurisdiction has to offer. Creating real economic substance in Cyprus is key to take advantage of the numerous benefits both fiscal and non-fiscal the island has to offer.
For more information you may refer to our publications “Using Cyprus as a Business Headquartering Base” & "Establishing Economic Substance in Cyprus".
ANNEX A
Practical Examples
Cases
Asset developed internally; R&D costs incurred by the company itself
Asset acquired; R&D development outsourced to non-related parties
Asset acquired; R&D development outsourced to related parties
Applying the Nexus Formula
*DISCLAIMER: This article and its publication are intended to provide a brief introduction and act as a general guide on the IP Box Regime and Cyprus Business Environment. This is provided for information purposes only and cannot be utilized as a substitute for professional advice. This document does not represent a legal opinion and each natural or legal person seeking to benefit from the IP Box Regime should seek independent advice based on the particulars of its case. No responsibility is accepted by the author or the publishers for any loss suffered from acting or refraining from acting based on the contents of this publication.
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