What is the IP Box Regime?
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.
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 (QA)
“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.
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.
1. Asset developed internally; R&D costs incurred by the company itself
2. Asset acquired; R&D development outsourced to non-related parties
Asset acquired; R&D development outsourced to related parties
Applying the Nexus Formula
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