Intellectual Property Rights Company. Securing the intangible asset and Tax advantages.
IP company in Cyprus.
Cyprus combines protection provided by EU and the International Regime of IP protection, after the agreements signed by the Republic of Cyprus. At the same time the tax regime of Cyprus provides important exemptions from the income tax arising from the use of Intellectual Property rights, something that is hard to find in other jurisdictions.
The extensive network of Double tax avoidance agreement, combined with the EU community directive, offer an attractive taxation scheme on the exploitation of Intellectual Property rights through Cyprus. Cyprus has signed multiple European and International agreements, and is a member of many organizations and communities for the development and the protection of IP rights. Some of them are: World Intellectual Property Organization, the agreement and protocol of Madrid for the international registration of trademarks, Paris convention for the protection of IP, the Patent Cooperation Treaty, the Bern convention on the protection of literature and artworks.
Intellectual Property rights in Cyprus works automatically and no registration is needed.The Intellectual Property Law (59/1976) protects Cyprus citizens for their work issued anywhere in the world and the foreigners for their work issued in Cyprus. Intellectual Property copyrights are protected for:
- Scientific Work
- Literature
- Music
- Art & Photography
- Movies
- Databases
- Recordings
- Software
- TV and Radio Shows
- Publications
IP Box regime.Tax incentives.
Cyprus IP regime is fully compliant with international developments in the tax treatment of IP income and OECD’s guidance. The IP regime has been reviewed by the EU Code of Conduct and has been assessed as fully compatible with EU standards.
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.
Qualifying Assets.
Qualifying assets include.
- Patents
- copyrighted software programs, and
- other intangible assets that are non-obvious, useful and novel. Qualifying assets do not include trademarks and copyrights.
Qualifying persons.
Qualifying persons include Cyprus tax resident taxpayers, tax resident Permanent Establishments (PEs) of non tax resident persons as well as foreign PEs that are subject to tax in Cyprus.
Qualifying profits.
Qualifying profits are calculated in accordance with the nexus fraction.
The Nexus Fraction.
The nexus fraction is used to determine the amount of qualifying profits that will give the relevant deduction to the taxpayer. The provisions of the Intellectual Property regime link the benefits of the regime with Research & Development investments by the taxpayer. Qualifying taxpayers will be eligible to claim a tax deduction up to 80% of qualifying profits resulting from the business use of the qualifying assets.
The nexus approach is an additive approach; the calculation requires both that QE includes all qualifying expenditures incurred by the taxpayer over the life of the IP asset and that OE includes all overall expenditures incurred over the life of the IP asset.
Qualified profits are calculated as the example below.
Qualified Expenditure (QE)
The qualifying expenditure includes salary and wages, direct costs, general expenses associated with R&D activities and R&D expenditure outsourced to unrelated parties. The QE does not include any acquisition costs of the IP, interest paid or payable, any amounts payable to related persons carrying out R&D and costs which cannot be proved to be directly associated with a specific QA.
Uplift Expenditure (UE)
The up-lift expenditure (UE) is the lower of:
- 30% of the QE and
- The total acquisition cost of the QA and any R&D costs outsourced to related parties.
Overall Income (OI)
The overall income (OI) is calculated as the gross income less any direct expenditure (including the capital allowances) of this asset, i.e. the gross profit. Overall income includes, but is not limited to, royalties received for the use of the intangible asset, trading income from the disposal of qualifying asset and embedded income earned from the qualifying asset. Capital gains arising from the disposal of a QA are not included in the overall income and are fully exempt from tax.
Overall Expenditure (OE)
Overall expenditure is the cost of the acquisition or development of intangible property of a capital nature is amortized in a reasonable manner over its useful economic life based on accounting principles within 20 years.
Losses from the qualifying assets.
Where the calculation of qualifying profits results in a loss, only 20% of this loss may be carried forward or group relieved.
Other intangible assets.
Other intangible assets that are used in the business of a taxpayer and do not qualify for the IP regime may still benefit from other provisions of the Cyprus tax law. In particular, capital allowances and/or notional interest deduction (NID) may be available to these assets, which will help reduce the overall effective tax rate of the company. Examples of such assets include trademarks, copyrights and other intellectual property assets.
Capital allowances.
As from July 2016, the capital costs of intangibles (excluding goodwill and qualifying assets as defined in the IP regime) are tax deductible in the form of capital allowances. The cost is spread over the useful life of the asset with a maximum useful life of 20 years.
Notional Interest Deduction (NID).
NID may be available on assets introduced in a Cyprus company through equity which are employed in the production of taxable income.