Cyprus offers a simple, attractive IP regime as well as maximum protection for IP owners due to the ratification of all major IP treaties and protocols.
Background. Cyprus’ IP regime is fully compliant with international Developments and follows the guidance of the OECD. The IP regime has been assessed by the EU Code of Conduct and approved as fully compatible with EU standards.
Benefits of the Cyprus IP regime. The regime's main aspect is that 80% of the qualifying profits qualifying are exempt from tax. Only 20% of the IP income is taxed at the corporate tax rate of 12.5%, while the remaining income can be potentially taxed as low as 2.5%.
Relevant details of the regime. The IP regime provides that an amount equal to 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, which requires a direct link between the income benefiting from the IP regime and the extent to which the taxpayer has undertaken the underlying R&D that generated the IP asset.
The nexus fraction. The nexus fraction is used to determine the amount of qualifying profits that will give the relevant deduction to the taxpayer.
Overall Income (OI). The overall income (OI) is calculated as the gross income less any direct expenditure (including the capital allowances) of the 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 the 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.
Cumulative nexus fraction. The nexus approach is additive; 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.
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.
Disposal of an IP. When an IP asset is disposed of, an accounting profit/loss may arise. ISuppose the disposal is considered as a capital nature transaction. In that case, the accounting gain/loss should be exempt from tax in Cyprus, whereas if the disposal is considered a trading nature transaction, the accounting gain/loss should be taxable. Up to 31 December 2019, upon the disposal of an IP asset, the taxpayer would also be obliged to prepare a balancing statement to calculate the taxable gain/loss as follows: Disposal proceeds less tax written down value of the asset (TWDV), whereby TWDV is the cost of the IP asset less accumulated capital allowances claimed. As of 1 January 2020, there is no obligation to prepare a balancing statement when disposing of an IP asset. Consequently, a capital nature disposal of an IP asset should not trigger any Cyprus tax implications.
Income from non-qualifying intangible assets. Income arising from non-qualifying intangible assets used in the business can still benefit from certain provisions of the Cyprus tax law. In particular, capital allowances and/
or notional interest deduction (NID) may be available to be deducted from such income, which should help reduce the overall effective tax rate of the company. Examples of such
intangible assets include trademarks, copyrights and other IP assets.
Capital allowances. All intangible assets (excluding goodwill), irrespective of whether they are qualifying assets or not, are eligible for tax amortisation (capital allowances) over their useful economic life with a maximum of 20 years. However, the taxpayer has the option not to claim capital allowances in a given year, and capital allowances that have not been claimed in a year can be claimed over the remaining useful life of the asset.
Notional Interest Deduction (NID).
NID (Non-Investment Income Deduction) may be applied to assets used to generate taxable income introduced through equity in a Cyprus company.