Cyprus IP Box Regime

Introduction

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. Applying to Cyprus corporate tax rate of 12.5% – which is among the lowest in the EU – provides an effective tax rate of 2.5%.

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 within the same company.

Article 9(k) of the Income Tax Law of the Republic and the Administrative Degree 336/2016 are summarized below:

1. Qualifying intangible assets (QA)

Qualifying Intangible Asset means an asset that was acquired, developed or exploited by a person in furtherance of his business, excluding intellectual property associated with marketing and which is the result of research and development activities which includes intangible assets for which economic ownership exists.

Such assets are the following:

• Patents as defined in the Patent Law;

• Computer Software;

• Other IP assets that are legally protected and they fall under one of the following:

• Utility models, intellectual property assets which provide protection to plants and genetic material, orphan drug designations and extensions of protections for patents;

• Nonobvious, useful and novel, where the person which utilizes them in furtherance of a business does not generate annual gross revenues exceeding €7.500.000 (in case of a group of companies not exceeding €50.000.000). Intangible assets of this subcategory should be certified by an appropriate Authority in Cyprus or abroad.

Business names (including brands) trademarks, image rights and other intellectual property rights used to market products and services are not considered as qualifying intangible assets.

2. Qualifying expenditures (QE)

Qualifying expenditure for qualifying intangible asset is the sum of total research and development costs incurred in any tax year, wholly and exclusively for the development, improvement or creation of qualifying intangible assets and which costs are directly related to the qualifying intangible assets.

Qualifying expenses include, but are not limited to, the following:

• Wages and salaries;

• Direct costs;

• General expenses relating to installations used for research and development;

• Expenses for supplies related to research and development activities;

• Costs associated with research and development have been outsourced to non-related persons.

Qualifying expenses do not include the following:

• Cost of the acquisition of intangible assets;

• Interest paid/ payable;

• Costs relating to the acquisition or construction of immovable property;

• Amounts paid/ payable directly or indirectly to a related party to conduct research and development activities, regardless of whether these amounts relate to cost sharing agreement;

• Costs that cannot be proved directly connected to a specific eligible intangible asset.

Uplift expenditure will be added to the above costs, which means the lower of:

• 30% of the eligible costs, or

• the total amount of the cost of acquisition and outsourcing to related parties for research and development in relation to the eligible intangible asset.

3. Qualifying income (QI)

Qualifying income derived from the qualifying intangible asset is defined as the gross income earned during the tax year, minus any direct costs incurred for the qualifying intangible asset.

The Overall Income includes, but is not limited, to the following:

• Royalties or any other amounts in relation to the use of the qualifying intangible asset;

• Any amount for the grant of a license for the operation of qualifying intangible assets;

• Any amount received from insurance or as compensation in relation to the qualifying intangible asset;

• Trading income from the disposal of the qualifying intangible asset;

• Embedded income on the qualifying intangible which is derived from the sale of goods, services or use any processes which are directly related to the qualifying intangible.

4. Qualifying profits

Qualifying profits arising from the qualifying intangible asset means the gross income accrued within the tax year, less the direct costs for generating such income.

Direct costs include:

• all direct and indirect costs incurred in earning the income from the qualifying intangible asset

• the amortization of the cost of the intangible

• Notional interest on equity contributed to finance the development of the qualifying intangible asset

5. Calculation of taxable profit

Nexus formula:

The deductible expense is calculated as 80% of the overall income derived from the qualifying intangible asset (effective tax rate 2,5%).

Every year the taxpayer may elect not to claim the whole or part of this allowance.

6. Losses

In the case of a resulting loss, only 20% of the loss can be surrendered to other group companies or be carried forward to subsequent years.

7. Capital gains

Capital gains arising from the disposal of qualifying intangible assets are not included in overall income and are fully exempt from tax. From 1 January 2020, the obligation to prepare a balancing statement upon a transfer or sale of an intangible asset is abolished.

8. Capital expenditure and amortisation

Capital expenditure related to IP acquisition or development may be deducted in the first tax year in which the expense was incurred as well as in the subsequent years. That is, development or acquisition expenses are amortized over a period of up to 20 years. This in practice can lower the effective tax rate to less than 2%.

PRACTICAL EXAMPLE

Year End: 2023
IP Box Calculation (under new rules)
	2022	2023
Balance Sheet
Cost of the IP (capitalisation of development costs from RP)	20,000.00	35,000.00
Profit and loss account	100%
Royalties, licenses, or other embedded income arose from QA	-130,000.00	-150,000.00
Rendering of services	-130,000.00	-150,000.00
Qualifying (for the generation of qualifying income)	60,000.00	63,000.00
Amortisation (UEL i.e. 10 years)	2,000.00	3,500.00
Other (commissions etc)	13,000.00	15,000.00
Gross profit / Qualifying profit	-55,000.00	-68,500.00
Admint, Selling & Finance exp (allowable)	5,000.00	6,000.00
Admint, Selling & Finance exp (non allowable)	500.00	500.00
Net profit	-49,500.00	-62,000.00
Net chargeable profit	– 50,000	– 62,500
Tax treatment of new IP Box rules
Overall Income (OI) from qualifying IP (after deduction of direct costs incurred for generating the income)	-55,000	-68,500
Qualifying Expenditure (QE)- ANY TAX YEAR
• Internal R&D for the creation and development of asset	0	0
• R&D for improvement of assets outsourced to non-related parties	0	0
• Wages and salaries other direct costs	60,000	123,000
	60,000	123,000
Uplift expenditure, being the lower of
• 30% of the qualifying expenditure, and	18,000	36,900
• Total cost of acquisition plus cost of outsourcing R&D to related parties	20,000	35,000
Overall Expenditure (OE) – ANY TAX YEAR
• Cost of acquisition of asset	20,000	35,000
• R&D costs incurred internally for creation and development of the asset	0	0
• R&D costs for improvement of the asset, outsourced to non-related parties	0	0
• R&D costs for improvement of the asset, outsourced to related parties	0	0
• Qualifying expenditure (other than R&D)	60,000	123,000
	80,000	158,000
Formula calculation of Qualified Profit
(QE + UE)	78,000	158,000
[ (QE + UE) / OE ]	97.50%	100.00%
QP = OI * [ (QE + UE) / OE ]	-53,625	-68,500
Tax Benefit 80% of QP as notional deduction	-42,900	-54,800
TAX CALCULATION
Chargeable income- before IP Box	-50,000.00	-62,500.00
Less IP box	42,900.00	54,800
Less other non allowable expenses
Chargeable income – after excluding IP box	-7,100.00	-7,700,00
Less: carried forwarded losses	Net profit	0.00
Chargeable income	-7,100.00	-7,700.00
Corporation tax liability x 12.5%	– 888	-963