Intellectual Property (IP) Taxation – IP Box

Using a Cyprus Limited Company to hold Intellectual Property

Intellectual Property (IP), in most of the cases is the most valuable asset of a group. Management needs to protect the IP on the one hand but have economic benefits on the other hand as well. Therefore to choose the right location for the management and/or the development of the IP is a very critical decision and the management must take into consideration both the legal system as well as the tax system of the preferred location.

The robust legal system of Cyprus which is based on both the Common Law and the EU legislation and the Cyprus’s IP Box regime can provide both safety and tax advantages to the organization that chooses Cyprus as the jurisdiction to develop and manage its IP.

Intellectual Property Tax in Cyprus

Cyprus’s Intellectual Property Tax Regime (IP Box) which is in full compliance with the recommendations of the OECD and the European Union on taxation related to intellectual property.

The Cyprus’s IP Box Regime entails a Tax Benefit which provides for an 80% exemption of income from and gains on the sale of Qualified IPs and coupled with the 12,5% Cyprus Income Tax rate it can reduce the effective tax rate to 2.5% or less.

It is safe to say that structuring IP holding and/or management activities through a Cyprus Company is one of the most advantageous structures on global scale.

Qualified IP Assets

Eligible IP assets shall include:

  • Patents
  • Utility models
  • Certain supplementary protection certificates
  • Copyrighted software
  • Plant breeder’s rights
  • Orphan drug designations

Commercial IP assets such as trademarks and designs are not eligible for the tax incentive.

The OECD’s Nexus Approach which is now embedded in Cyprus Income Tax Law determines which income may receive tax benefits by applying the following calculation:

Qualifying Profit = Overall Income X (Qualifying Expenditure + Uplift Expenditure) / Overall Expenditure

Qualifying Expenditure

  • is the sum of all Research and Development (R&D) which has incurred in any tax year, wholly and exclusively for the development, enhancement or creation of the QA.

It includes but is not limited to:

  • Wages and salaries;
  • Direct costs
    • All direct and indirect costs incurred in earning the income from the QA;
    • Amortization expense of the QA;
    • Notional Interest on equity contributed to finance the development of the QA;
  • General expenses related to premises that are being used for R&D activities;
  • Commission expenses associated with R&D activities; and
  • Expenses associated with R&D activities that have been outsourced to unrelated parties.

Qualifying Expenditure does not include:

  • Acquisition costs;
  • Interest paid or payable;
  • Cost related to the acquisition or construction of immovable property;
  • Amounts paid or are payable to related parties for R&D activities, irrespective of whether a Cost Sharing Agreement exists;
  • Expenses which cannot be evidenced that it has a direct relation with the QA.

*An Up-lift of the Qualifying Expenditure is allowed which is determined as below:

The lower of:

  • 30% up-lift to QE; and
  • The total of the acquisition cost plus the cost of any outsourcing to related parties with regards to R&D activities concerning the IP Asset.

Overall Expenditure is the total of:

  • Qualifying Expenditure;
  • Total Acquisition Cost; and
  • Cost of outsourcing to related parties of any R&D activities related to the QA

Overall Income

  • that is derived from the exploitation of the IP Asset means the gross income which is earned during the tax year after deducting the direct expenses that occur to earn that income.

Overall Income includes but it’s not limited to:

  • Royalties;
  • Licensing income;
  • Capital gains from the sale of the QA;
  • Income received from insurance or compensation of the QA;
  • Embedded income of the QA that derives from the sale of products or services or from the uses of processes directly related to the QA.

Tax payers who choose to apply for the tax benefit of the Intellectual Property Tax  regime (IP Box Regime) is obliged to maintain proper books of account s and records of the income and expenditures of each QA.

(OI) Overall Income from exploitation of the IP asset €100.000,00
Less (QE) Qualified Expenditure €40.000,00
Net Profit from operations €60.000,00
80% Exemption €6.000,00  *  80% €48.000,00
Income Receiving Tax Benefits €12.000,00
Tax Liability €1.200,00  *  12,5% €1.500,00
Effective Tax Rate 2,5%