Cyprus provides entrepreneurs with unique tax advantages. The main tax rate for companies – corporation tax in Cyprus is 12.5%, which is already one of the lowest in Europe. However, there is the possibility of additional optimization of taxation through the program – Cyprus IP Box Tax Regime.
What is the Cyprus IP-Box regime?
IP-box (Intellectual Property Box) is a preferential tax regime in Cyprus for company profits from innovation and investment in intellectual property, under which the corporate tax rate can be reduced to 2.5%.
Benefits of the Cyprus IP regime
In accordance with the Cypriot intellectual property regime – 80% of the profits qualifying for the regime are exempt from tax. With a corporate tax rate of 12.5%, this can result in an effective tax rate of as low as 2.5%.
Under the Cyprus IP regime, 80% of the qualifying profits generated from the qualifying assets is deemed to be a tax deductible expense for qualifying taxpayers. In calculating the qualifying profits, the new regime 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 qualifying asset (QA) within the same company.
What assets does IP-box apply to in Cyprus?
To take advantage of the lowest tax rates of 2.5%, IP-Box applies to certain types of assets, called qualifying assets (QA).
Qualifying assets (QA) under the new regime include:
patents,
copyrighted software programs, and
other intangible assets that are non-obvious, useful and novel.
The definition of qualifying intangible assets specifically excludes business names, brands, trademarks, image rights and other intellectual property rights used for the marketing of products and services.
Moreover, such assets must be fully developed in Cyprus by the company’s employees for the purpose of doing business or can be purchased/taken for use from a third party unrelated to the company.
Who are Qualifying Persons or Establishments under the Regime?
Qualifying Persons (QPs) or establishments include:
Cypriot tax residents;
Tax resident permanent establishments (PEs) of non-tax residents;
PEs from foreign countries who have agreed to be subjected to tax in Cyprus.
Qualifying Profit (QP) Under the Regime
The nexus fraction calculation of the Qualifying Profit is as follows:
QP = OI X (QE+UE)/OE
Where:
OI = Overall income from the QA QE = Qualifying expenditure on the QA UE = Uplift expenditure on the QA OE = Overall expenditure on the QA
1. Overall Income (OI)
Overall income is defined as the gross income earned from qualifying intangible assets during the tax year, minus any direct costs incurred for generating the income.
Overall income includes, but is not limited to:
royalties or other amounts resulting from the use of qualifying intangible assets
license income for the operation of qualifying intangible assets
any amount received from insurance or as compensation in relation to qualifying intangible assets
income from the disposal of qualifying intangible assets, excluding profits of a capital nature
embedded income of qualifying intangible assets arising from the sale of products or services, or from the use of procedures that are directly related to the assets
On calculating overall income, direct costs include as following:
all costs incurred, either directly or indirectly, wholly and exclusively for the purpose of earning the income from qualifying intangible assets
the amortization of the cost of the assets
notional interest on equity contributed to finance the development of the assets (being a notional interest tax deduction allowed by Cyprus tax provisions)
2. Qualifying Expenditure (QE)
Qualifying expenditure for qualifying intangible assets is defined as the sum of all R&D costs incurred during any given tax year wholly and exclusively for the development, improvement or creation of qualifying intangible assets, and which costs are directly related to such assets.
Qualifying expenditure includes, but is not limited to:
wages and salaries
direct costs
general expenses relating to installations used for R&D
commission expenses associated with R&D activities
costs associated with R&D activities that have been outsourced to non-related persons
Even so, qualifying expenditure does not include:
costs for acquisition of intangible assets
interest paid or payable
costs for acquisition or construction of immovable property
amounts paid or payable directly or indirectly to a related person to conduct R&D activities, regardless of whether such amounts relate to cost sharing agreements
costs which cannot be proved directly connected to a specific qualifying intangible asset
Any expenditure for R&D that has been outsourced to non-related parties, as well as any expenses of a general nature for R&D, which cannot be allocated to the qualifying expenditure of a specific qualifying intangible asset, can be apportioned pro rata to the qualifying intangible assets
3. Uplift Expenditure (UE)
An uplift expenditure is added to the qualifying expenditure, which will be equal to the lower of:
30% of the qualifying expenditure
the total cost of acquisition of the qualifying intangible assets, plus the cost of outsourcing to related parties of any R&D activities in relation to such assets
4. Overall Expenditure (OE)
Overall expenditure relating to qualified intangible assets is defined as the sum of:
the qualifying expenditure
the total cost of acquisition of the qualifying assets, plus the cost of outsourcing to related parties of any R&D activities in relation to these assets, incurred during any tax year
In total, in order to benefit from the preferential tax rate of 2.5%, companies in Cyprus must meet the following IP-box conditions:
Registration of a company in Cyprus in accordance with local legal requirements. The company must be registered, have a corporate bank account and be considered a Cypriot tax resident. How to register a company in Cyprus»»
Ownership of qualified assets and their development. The company must own assets that meet the criteria for qualifying assets and actively develop them for commercial use.
Generation of income from qualifying assets. The company’s primary source of income must be derived from the use and commercialization of specified qualifying assets. This means that the company must generate income from these assets.
Accounting and declaration. Anyone wishing to claim benefits under the regime must prove proper credentials. Therefore, they must maintain books of accounts as well as income/expense records for each qualifying asset.
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Optimizing taxes in Cyprus requires competent tax planning. Our Cypriot lawyers and tax advisors offer expertise and assistance in developing the most beneficial strategies for businesses and individuals. Contact us and we will be glad to see you in our office in Larnaca!
IP-box (Intellectual Property Box) is a special tax regime in Cyprus that provides benefits to companies generating income from innovation and investment in intellectual property. Under this regime, the corporate tax rate can be reduced to 2.5%.
What tax benefits does IP-box provide?
80% of profits derived from the use of intangible assets are deductible for tax purposes. Thus, only 20% of the income from intellectual property assets is taken into account after deducting the costs of generating income. Accordingly, applying a corporate tax rate of 12.5% to the remainder results in an effective corporate tax rate of 2.5%.
For which companies is IP-box Tax Regime suitable?
IP-box mode is suitable for companies that are involved in innovation and investment in intellectual property. These may include research and development companies, software companies, patent holders and other organizations that have income from other useful and new intangible assets.
Why is the Cyprus IP Box Tax Regime the most popular in the EU?
IP Box mode in Cyprus guarantees maximum protection for IP (intellectual property) owners
The tax regime is approved as complying with all EU standards and regulations.
The state provides preferential tax treatment not only to companies, but also to individuals
Simplicity and speed of opening any type of company
Elena Georghiou – Founder and Managing Director of Feod Group. Has two higher educations: the first at the Odessa State Polytechnic University, majoring in automation and computer engineering (1986) and second in the Moscow State Law Academy, majoring in law (1991). Has work experience in London i...
Elena Georghiou – Founder and Managing Director of Feod Group. Has two higher educations: the first at the Odessa State Polytechnic University, majoring in automation and computer engineering (1986) and second in the Moscow State Law Academy, majoring in law (1991). Has work experience in London immigration law firms. Is a regular participant in seminars and trainings on immigration, corporate and private law of the European Union. Elena Georghiou has more than 25 years of legal experience and heads the specialized Residency and Citizenship practice across European countries, UK and USA advising HNWIs and their families on:
immigration planning;
consultations on obtaining alternative (second) citizenship;
Residency and Citizenship by Investment;
business immigration;
preparation of appeals, working with complex immigration cases.
She advises individuals and corporate clients for wealth/business structuring and assets protection. Central to her Managerial role in the company she initiated and united high level lawyers and other top professionals around the word in order to provide Feod Group clients with bespoke level of legal and business services word wide, keeping the staff focused on the opportunities and challenges faced by each individual client. Speaks Russian, Ukrainian, English.
Since 1992, Feod Group has been providing a wide range of legal, business and immigration services in Europe, the USA and other countries of the world.
The company has accredited western lawyers, experts in various fields of law and jurisdictions of the world.
Having offices in Europe and the USA, Feod Group provides rapid paperwork and maximum customer comfort.
We provide our clients with related services, such as relocation and adaptation abroad, organizing family relocation abroad, enrollment of children in schools and many other services.
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