Cyprus IP Regime is one of the most appealing Tax Regimes offered to Cyprus Companies, due to the benefit to pay Income Tax on IP Royalties income with an effective tax rate of 2.5% instead of 12.5%
Since January 2016 there were some changes on the old IP regime, not on the effective tax rate but on becoming more specific on which IP assets are to be qualified with the IP Tax Regime. The old IP regime was valid for the existing IP assets acquired before 2nd January and for any IP Assets acquired from 2nd January until 30th June 2016, from related parties. The old IP regime applies up and until the 30th June 2021.
Old Regime – Qualified IP assets:
- Copyrights on the following: literary works, dramatic works, musical works, scientific works, artistic works, sound recordings, films, broadcasts, published editions, databases, publications, software programmes
- Patented inventions
- Trademarks (and service marks), designs and models that are used or applied on products
- Registrable IPs need not be registered in Cyprus to benefit from IP regime.
- Anything that could be justified as intellectual property, but an asset that had value and substance to be licensed
New Regime – Qualifying IP assets
- computer software
- IP assets which are non-obvious, useful novel and from which the income of a taxpayer does not exceed, in a 5 year period, €7.500.000 per annum (€50.000.000 for taxpayers forming part of a Group).
Do not cover
- image rights and
- other intellectual property rights used for the marketing of products or services
Modified nexus approach
An IP Asset should have a sufficient substance and should be a strong connection between the expenses and the IP asset income. IP asset income should be back up by the expenses paid by the Company for Research and Development of the IP asset, which adds value and the substance to the asset.
The following formula has been introduced to determine the qualifying profits that can benefit from an IP regime under BEPS:
[(Qualifying expenditure + Up-lift expenditure)/Total expenditure] x Overall IP Income
* Qualifying expenditure, excludes the R&D costs of outsourcing to related parties
Tax benefits of Cypriot IP companies
The new provisions provide exemptions from tax of income related to IP. More specifically:
- 80% of worldwide royalty income generated from IP owned by Cypriot resident companies (net of any direct expenses*) is exempt from income tax
- 80% of profit generated from the disposal of IP owned by Cypriot resident companies (net of any direct expenses*) is exempt from income tax
- any expenditure of a capital nature for the acquisition or development of IP is claimed as a tax deduction in the year in which it was incurred and the immediate four following years on a straight-line
- All the above exemptions are also available for IPs acquired or developed before January 2012
Assume that a Cyprus IP company licenses its IP to its operating foreign Companies and in return it receives royalty income of €100.000 per year.
The expected annual tax for the Cyprus IP Company will be as follows
|Annual royalty income||100.000|
|Direct expenses (say)||(20.000)|
|80% deemed deduction||(64.000)|
|@12.5% Income tax||2.000|
|Effective tax rate||2.5%|
Companies are required to maintain records, with the income and related expenses related to the IP Asset, so that will be able to justify the amount of IP income compare to the cost to maintain the IP Asset.
Cyprus is signatory to the following international conventions relevant to IP
- European Community Trademarks
- Convention Establishing the World Intellectual Property Organisation (WIPO)
- The Madrid Agreement Concerning the International Registration of Marks (the Madrid
Agreement) and Protocol to the Madrid Agreement
- The Patent Cooperation Treaty
- Berne Convention for the Protection of Literary and Artistic Works
- Paris Convention for the Protection of Industrial Property
- Convention for the Protection of Producers of Phonograms Against Unauthorised Duplication of Their Phonograms
- WIPO Performance and Phonograms Treaty
- Rome Convention for the Protection of Performers, Producers of Phonograms and
- Trademark Law Treaty
- WIPO Beijing Treaty on Audiovisual Performances