The IP regime in Cyprus is compliant with international developments. It follows the guidance of the IP income and OECD on tax treatment. The IP regime has been thoroughly assessed and approved as fully compatible with EU standards.
80% of the profits qualifying for the IP box 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 under the new regime 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 that follows.
QE + UE
OI x ———————
OE
Where:
OI is the “overall income derived from the QA”
QE is the “qualifying expenditure on the QA”
UE is the “uplift expenditure on the QA” and
OE is the “overall expenditure on the QA”
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.
Qualifying 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 Expenditure (OE)
The overall expenditure (OE) is the sum of:
• The qualifying expenditure and
• The total acquisition costs of the QA and any R&D costs outsourced to related parties incurred in any tax year.
