Date added: : 12.05.2016

Cyprus has a tax privilege regime in respect of intellectual property owned by a Cypriot company.

This regime is effective from January 01, 2012, and is a programme that regulates the taxation of royalties for Cypriot companies that possess intellectual property. This programme applies to all categories of intellectual property, including - in respect of patents, trademarks, copyrights. The Cyprus IP-Box regime applies to all intellectual property objects owned by a Cyprus company, regardless of the jurisdiction in which the objects are registered or created.

The essence of this regime is the exemption from taxation of 80% of the profits received from the sale of intellectual property in Cyprus; exemption from taxation of 80% of gross profit derived from the use of intellectual property in Cyprus; when determining the profit tax base in Cyprus obtained from the use of intellectual property objects, the expenses incurred by the company in connection with the receipt of this income are accounted for and are subject to amortization in equal shares within 5 years starting from the year of registration of the intellectual property object (ie annually 20% of expenses are allowed to be deducted).

In Cyprus, there is a wide range of intellectual property objects, in relation to which this regime can be used.

The effective tax rate in Cyprus is 2.5% or lower.

Example of application of preferential taxation in respect of intellectual property in Cyprus:

Annual income - 200

Expenses - 50

Profit - 150

Exemption from taxes 80% - 120

Profit taxable - 30

12.5% income tax - 3.75%

Features of the Cyprus IP-BOX regime

The income tax rate of 12.5% in Cyprus creates an effective rate of 2.5% for taxation in respect of intellectual property;

2.5% - the lowest effective rate in Europe;

this rate is much lower than in other countries that assume similar IP-regimes (UK - 10%, the Netherlands - 5%, Luxembourg - 5.7%).

In order to be able to use the above-described regime, the company in Cyprus (the owner of the IP object) must necessarily conduct real activities and incur certain costs for the development and renewal of the objects of intellectual property. Also, a Cypriot company can not be affiliated with a company that pays royalties to it. It is possible to take advantage of the IP-Box regime until June 30, 2016. At the same time, tax privileges of this regime can be used until the middle of 2021.

However, the Rules for Base erosion and profit shifting with respect to Intellectual Property (BEPS rules), approved by the Organization for Economic Cooperation and Development, came into force on 05.10.2015.

In these rules it was decided at the EU level that the EU member states will henceforth be guided by the existence of a confirmation of the real activity of the company owning intellectual property rights in order to recognize tax benefits for the company.

By these rules it was decided to adhere to the "linking approach" regarding the application of tax incentives in relation to intellectual property.

This approach assumes that a taxpayer company can benefit from the intellectual property regime only to the extent that the company has incurred research and development costs for IP objects that ultimately led to income generation.

In other words, in order for the tax authorities to recognize the right of a Cypriot company to use tax incentives for intellectual property objects, the owners of the company must confirm that the company does not simply "possess" intellectual property rights but conducts real business, that the company has spent certain funds for the development and maintenance of intellectual property, that these objects are really needed by the company in its activities.

REQUIREMENTS FOR USE OF THE IP-BOX REGIME

In order to comply with the requirements for the IP-Box regime, it is enough to register a company in Cyprus and to transfer the rights to the object of intellectual property of this company in accordance with the procedure established by law until June 30, 2016, or to create an intellectual property object from scratch and initially retain the right to it by a Cypriot company.

Draw your attention to the fact that it does not matter in which jurisdiction the rights to the intellectual property object owned by the Cypriot company are registered. Tax benefits apply to intellectual property objects registered in any jurisdiction. The main thing is that their copyright holder is a Cyprus company.

Also, we want to draw your attention to the fact that there is no special procedure for applying for permission to use IP-Box regime in Cyprus. After the registration of the company in Cyprus and the transfer of rights to IP to it or the assignment of initial rights to the IP object, such company automatically has the right to use this regime.

Auditors who will conduct a company audit have the right only to verify the validity of the grounds for using this regime.

If your company can confirm compliance with these requirements, the IP-Box regime can be used to obtain profit from the use of IP objects of the company by third parties (and also other advantages of this regime) until June 30, 2021.

There are the main requirements that must be met by the activities of your Cyprus company, so that you can use this regime until June 30, 2021:

  • if the object of intellectual property is newly created, it is important to assign the rights to this object to the company until June 30, 2016, because in respect of IP objects recorded by the company after this date, the IP-Box regime will not be applied; the newly created concept means an object of IP, which was not purchased by the Cyprus company, but was created by it (its employees) or in respect of which an application for registration was filed on behalf of the Cyprus company itself;
  • also, your Cypriot company may acquire rights to the intellectual property object by June 30, 2016 and use this regime if the rights to the IP object are transferred to your company from an unrelated person (ie an agreement was concluded with another legal entity or natural person on the transfer of rights to a certain IP object, while your company and the company transferring rights are not be related in any way);
  • this regime for IP objects, the rights to which are transferred to a Cypriot company from related persons, can only be used for IP objects transferred before December 31, 2015, so this opportunity has already been lost; in the event that the rights to the IP object are transferred to a Cypriot company from a related person, then the company will be able to use this regime only until December 31, 2016, in the case if the previous owner has enjoyed the privileges of this regime before 01/01/2016 in respect of this IP object, it will be possible to use the IP-Box regime until June 30, 2021;
  • there must necessarily be a link between the profit earned from the company's IP and the costs of the company. It will be necessary to confirm to the auditors the existence of the costs of developing and maintaining an intellectual property object. So, for example, if we are talking about software as an object of copyright, it will be necessary to confirm to the auditors the costs of renting the office, purchasing the necessary equipment, paying wages to software developers, and actually confirming the availability of employees of the company by the relevant documentation; it will be necessary to demonstrate to the supervisory authorities that the Cyprus company was established not simply to "possess" IP rights for an object, but that it does indeed conduct real activities within which it is necessary to use certain types of IP objects;
  • expenses related to the IP object from the Cyprus company can not exceed the company's revenues received from using the company software by third parties;
  • also, a Cypriot company can not be affiliated with a company that pays royalties, i.e. also should not be in any way connected with the company-licensee;
  • your Cyprus company will be obliged by the end of 2016 to have time to receive income from the use of the object of intellectual property, otherwise it will be allowed to use this regime only until the end of 2016.

Contact our specialists and we will register a company for you in Cyprus and transfer / register intellectual property in its name in the shortest possible time, and we will advise you on all the nuances you are interested in applying this preferential taxation regime within your business!