Qualifying profit (QP) is defined as the proportion of the overall income (OI) derived from the qualifying asset, corresponding to the fraction of the qualifying expenditure (QE) plus the uplift expenditure (UE) over the overall expenditure (OE) incurred for the qualifying intangible asset. The amount of qualifying profit can be derived through the application of the following formula: Where: Overall Income (OI) Overall income is defined as the gross income earned from qualifying intangible assets during the tax year, minus any direct costs incurred for generating the income. Overall income includes, but is not limited to: royalties or other amounts resulting from the use of qualifying intangible assets license income for the operation of qualifying intangible assets any amount received from insurance or as compensation in relation to qualifying intangible assets income from the disposal of qualifying intangible assets, excluding profits of a capital nature embedded income of qualifying intangible assets arising from the sale of products or services, or from the use of procedures that are directly related to the assets On calculating overall income, direct costs include as following: all costs incurred, either directly or indirectly, wholly and exclusively for the purpose of earning the income from qualifying intangible assets the amortization of the cost of the assets notional interest on equity contributed to finance the development of the assets (being a notional interest tax deduction allowed by Cyprus tax provisions) Qualifying Expenditure (QE) Qualifying expenditure for qualifying intangible assets is defined as the sum of all R&D costs incurred during any given tax year wholly and exclusively for the development, improvement or creation of qualifying intangible assets, and which costs are directly related to such assets. Qualifying expenditure includes, but is not limited to: wages and salaries direct costs general expenses relating to installations used for R&D commission expenses associated with R&D activities costs associated with R&D activities that have been outsourced to non-related persons Even so, qualifying expenditure does not include: costs for acquisition of intangible assets interest paid or payable costs for acquisition or construction of immovable property amounts paid or payable directly or indirectly to a related person to conduct R&D activities, regardless of whether such amounts relate to cost sharing agreements costs which cannot be proved directly connected to a specific qualifying intangible asset Any expenditure for R&D that has been outsourced to non-related parties, as well as any expenses of a general nature for R&D, which can not be allocated to the qualifying expenditure of a specific qualifying intangible asset, can be apportioned pro rata to the qualifying intangible assets Uplift Expenditure (UE) An uplift expenditure is added to the qualifying expenditure, which will be equal to the lower of: 30% of the qualifying expenditure the total cost of acquisition of the qualifying intangible assets, plus the cost of outsourcing to related parties of any R&D activities in relation to such assets Overall Expenditure (OE) Overall expenditure relating to qualified intangible assets is defined as the sum of: the qualifying expenditure the total cost of acquisition of the qualifying assets, plus the cost of outsourcing to related parties of any R&D activities in relation to these assets, incurred during any tax year

CYPRUS IP BOX REGIME

Benefit From Intellectual Property Law

What is IP BOX
Features
Key Differences
Nexus Fraction
Examples
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WHAT IS IP BOX REGIME?

IP Box Regime (known also as a patent box, innovation box or IP box) is a corporate tax regime used by many countries to incentivize research and development activities by taxing revenues deriving from licenses, royalties, patents, sale or transfer of qualified IP assets differently offering lower taxes compared to other commercial revenues.

Intellectual Property (IP) is a commonly used term which includes mind creation results such as software programs, innovative algorithms and formulas, inventions, trade-secrets and know-how, manufacturing practices, marketing concepts, artistic works, designs, images, names and inventions used in commerce. It is one of the most valued assets a company can have. The IP assets may not have a fixed geographical nexus and can be relocated without significant costs. 85% of multinational companies use this flexibility to reduce overall tax burden by allocating valuable IP to group companies resident in countries with advanced IP box regime.

HISTORY OF IP BOX REGIME

Ireland introduced for the very first time a scheme in its Corporation Tax on 1970s, more specifically, was section 34 of the 1973 Finance Act, that gave the first incentive to total tax relief to respect royalties and other income from licenses patented in Ireland, even though this scheme was withdrawn later on 2010 under the National recovery Plan 2011-2015 of the Republic of Ireland.

French Tax Authorities, decided to adopt Ireland’s example, on 2001 in reducing rate of tax of revenues gained from IP licensing or the transfer of qualified IP. Later IP box regime started being a financial “trend” for several European countries such as Belgium, France, Hungary, Luxembourg, Netherlands, Spain, United Kingdom, Switzerland and Cyprus.

Referring IP Box Regime all over the Europe, it can be divided in two big groups: first one provides for reduced rates of tax on qualifying income (this strategy is implemented by France, Netherlands and United Kingdom), while second group, provides for an exemption of a specified proportion of revenues (this is implemented by Spain, Luxembourg, Belgium, Hungary and Cyprus). The second group subdivides into schemes that exempt a proportion of gross and those that exempt a proportion of net revenues.

It is very convenient to deal with intellectual property due to its non-physical character. So it can be easily border-crossed between different jurisdictions and tax systems, according to prevailing circumstances and developments in different countries.

PRINCIPAL FEATURES OF IP BOX REGIME
IN CYPRUS

80% exemption
of qualified profit from exploitation of IP assets

Four-fifths (80%) of the profit earned from the use of intangible assets is deducted for tax purposes. So, only 20% of IP income after deduction of the costs of earning the income, is taken into calculation. Therefore applying to Cyprus corporate tax rate of 12.5%, which is among the lowest in the EU, provides the effective tax rate of 2.5%.

0% tax on the gain from disposal of IP assets as a capital nature transactions

On 17 July 2020, the Cypriot House of Representatives approved a bill amending Section 9(1)(l) of the Income Tax Law which introduced a number of changes with respect to the tax treatment of intangible assets. Specifically, if disposal of intangible assets is a capital nature transaction then the resulting capital gain should not be taxable. The changes became effective from 1 January 2020 and the obligation to prepare a balancing statement upon a transfer or sale of an intangible asset is abolished.

Up to 20 years amortization period

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%.

Countries battle to attract innovative businesses by providing discounted tax rates for companies that established proper IP rights accounting and related cross-border operations

THE KEY DIFFERENCES BETWEEN COUNTRIES APPLYING IP BOX REGIME

One jurisdiction will be better on certain aspects, but another will be better on others, and the differences will have to be assessed and weighed against one another to make the best decision of the solution.

	Cyprus	Belgium	Hungary	Luxembourg	Netherlands	France	United Kingdom
Effective Tax Rate	2.5%	4.44%	4.5%	5.2%	7%	10%	10%
Qualifying IP Assets	Patents, computer software, utility models, other IP assets such as non obvious, useful or novel rights	Patents and supplementary patent certificates, copyrighted software	Patents, utility model protection, copyrighted software	Patents, trademarks, designs, domain names, models and software copyrights, brands for services for goods such as productions and marketing know-how	Self-developed intellectual property relating to patents, copyrighted software or approved R&D	Patents, utility certificates, copyrighted software	Patent and rights similar to it
Ineligible IP Assets	Business names, trademarks, image rights, marketing activities	Know-how, trademarks, designs, models, formulas and processes	Designs	Formulas, copyrights (other than software)	Trademarks, brands and acquired IP	Non patentable inventions, R&D activities	Trademarks, copyrights and designs
Internally Developed or Acquired?	Internally developed and acquired intellectual property	Self-developed IP rights or acquired or licensed from third parties	Internally developed and acquired intellectual property	Internally developed and acquired intellectual property, but not IP acquired from a related party	Self-developed only	Internally developed and acquired intellectual property	Internally developed and acquired intellectual property
Limitations on Where R&D Takes Place	Some	Some	None	None	Some	None	None
Qualifying Revenue	Royalty, licensing fees, compensation income, trading profits from the disposal of IP, capital nature gains form the disposal not subject to any tax	Patent income	Royalties	Royalties net of costs (amortisation, R&D costs, interest)	Net income from qualifying assets	Net results derived from licensing, sublicensing or selling of qualifying of IP rights	Net income from qualifying intellectual property
Deduction Rate	80%	85%	50%	80%	None – reduced tax rate	None-reduced tax rate	None – reduced tax rate
Overall Limit of Deduction	None	100% of pre-tax income	50% of pre-tax income	None	None	None	None
Gains on Disposal Included	Yes	No	Yes	Yes	Yes	Yes	Yes

2.5% Cyprus

Qualifying IP Assets
Patents, computer software, utility models, other IP assets such as non obvious, useful or novel rights

Ineligible IP Assets
Business names, trademarks, image rights, marketing activities

Internally Developed or Acquired?
Internally developed and acquired intellectual property

Limitations on Where R&D Takes Place
Some

Qualifying Revenue
Royalty, licensing fees, compensation income, trading profits from the disposal of IP, capital nature gains form the disposal not subject to any tax

Deduction Rate
80%

Overall Limit of Deduction
None

Gains on Disposal Included
Yes

4.44% Belgium

Qualifying IP Assets
Patents and supplementary patent certificates, copyrighted software

Ineligible IP Assets
Know-how, trademarks, designs, models, formulas and processes

Internally Developed or Acquired?
Self-developed IP rights or acquired or licensed from third parties

Limitations on Where R&D Takes Place
Some

Qualifying Revenue
Patent income

Deduction Rate
85%

Overall Limit of Deduction
100% of pre-tax income

Gains on Disposal Included
No

4.5% Hungary

Qualifying IP Assets
Patents, utility model protection, copyrighted software

Ineligible IP Assets
Designs

Internally Developed or Acquired?
Internally developed and acquired intellectual property

Limitations on Where R&D Takes Place
None

Qualifying Revenue
Royalties

Deduction Rate
50%

Overall Limit of Deduction
50% of pre-tax income

Gains on Disposal Included
Yes

5.2% Luxembourg

Qualifying IP Assets
Patents, trademarks, designs, domain names, models and software copyrights, brands for services for goods such as productions and marketing know-how

Ineligible IP Assets
Formulas, copyrights (other than software)

Internally Developed or Acquired?
Internally developed and acquired intellectual property, but not IP acquired from a related party

Limitations on Where R&D Takes Place
Some

Qualifying Revenue
Royalties net of costs (amortisation, R&D costs, interest)

Deduction Rate
80%

Overall Limit of Deduction
None

Gains on Disposal Included
Yes

7% Netherlands

Qualifying IP Assets
Self-developed intellectual property relating to patents, copyrighted software or approved R&D

Ineligible IP Assets
Trademarks, brands and acquired IP

Internally Developed or Acquired?
Self-developed only

Limitations on Where R&D Takes Place
Some

Qualifying Revenue
Net income from qualifying assets

Deduction Rate
None – reduced tax rate

Overall Limit of Deduction
None

Gains on Disposal Included
Yes

10% France

Qualifying IP Assets
Patents, utility certificates, copyrighted software

Ineligible IP Assets
Non patentable inventions, R&D activities

Internally Developed or Acquired?
Internally developed and acquired intellectual property

Limitations on Where R&D Takes Place
None

Qualifying Revenue
Net results derived from licensing, sublicensing or selling of qualifying of IP rights

Deduction Rate
None-reduced tax rate

Overall Limit of Deduction
None

Gains on Disposal Included
Yes

10% United Kingdom

Qualifying IP Assets
Patent and rights similar to it

Ineligible IP Assets
Trademarks, copyrights and designs

Internally Developed or Acquired?
Internally developed and acquired intellectual property

Limitations on Where R&D Takes Place
Some

Qualifying Revenue
Net income from qualifying intellectual property

Deduction Rate
None – reduced tax rate

Overall Limit of Deduction
None

Gains on Disposal Included
Yes

IP BOX COMPARISON SUMMARY

Cyprus IP Box Regime provides a maximum tax rate of 2.5% on income earned from IP assets. The comparable rate in its nearest competitors, Belgium at 4.44%, Hungary at 4.5% and Luxembourg at 5.2%, is twice that amount, followed by Netherlands at 7%, France at 10% and United Kingdom at 10% who seem to be behind Netherlands but far behind Cyprus.

Cyprus IP Box Regime applies to a wider range of income compared to other similar European scheme, most of which restrict benefits to income from patents and supplementary patent certificates.

While IP Box Regime schemes of Belgium, Hungary, Luxembourg, Netherlands and United Kingdom offer partial exemption of gains on disposal, the exemptions become less attractive for IP holders than those offered by the Cyprus scheme, due to their limitations on qualifying assets and less deduction rates.

RATIFICATION OF ALL MAJOR IP TREATIES

Cyprus offers an efficient IP tax regime for tax optimisation, as well as maximum protection and certainty for IP owners due to the ratification of all major IP treaties and protocols.

HOW TO APPLY FOR IP BOX?

NEXUS FRACTION IN IP BOX REGIME

On 14 October 2016, the House of Representatives passed amendments to the Income Tax Law in order to align the current Cyprus IP tax legislation with the provisions of Action 5 of the OECD’s Base Erosion and Profit Shifting (BEPS) project.

The Nexus fraction is used to determine the amount of qualifying profits that will give the relevant deduction to the taxpayer. In such cases, taxpayers would continue to benefit from the existing IP regime for a maximum of 5 years, after which date the new IP tax regime will be applied.

Taxpayers should be familiar with the process of calculating the qualifying profits and ensure they have proper accounting in place to separate out relevant income streams and gather information on R&D spend, in order to perform the nexus calculations.

Taxpayers should carefully examine the potential impact of the new tax provisions on their IP structures and operations. It’s more safe to order and consult professional services from companies that are expert in IP Box Regime legislation and can calculate nexus fraction as well as prepare the required set of documents.

PROVISIONS OF THE NEW CYPRUS IP BOX REGIME

The new IP regime complies with the provisions of the modified ‘nexus approach’, whereby for an intangible asset to qualify for the benefits of the regime, there needs to be a direct link between the qualifying income and the own qualifying expenses contributing to that income. In brief, an amount equal to 80% of the qualifying profits earned from qualifying intangible assets will be allowed as a tax deductible expense.

Qualifying Intangible Assets

As per the amended legislation, “qualifying intangible asset” is defined as an asset which was acquired, developed or exploited by a person within the course of carrying out his business (with the exception of intellectual property related to marketing), which is the result of research and development (R&D) activities, and which includes intangible assets for which only economic ownership exists.

Qualifying intangible assets comprise of:

patents, as defined in the Patents Law
computer software
other IP assets which are legally protected and fall within one of the following categories:
- utility models, intellectual property assets which provide protection to plants and genetic material, orphan drug designations and extensions of protections for patents
- non-obvious, useful and novel, where the person utilizing them in furtherance of a business does not generate annual gross revenues in excess of €7,500,000 from all intangible assets (€50,000,000 in case of a group of companies), which are certified as such by an appropriate authority, in Cyprus or abroad.

The definition of qualifying intangible assets specifically excludes business names, brands, trademarks, image rights and other intellectual property rights used for the marketing of products and services.

Qualifying Profit

Qualifying profit (QP) is defined as the proportion of the overall income (OI) derived from the qualifying asset, corresponding to the fraction of the qualifying expenditure (QE) plus the uplift expenditure (UE) over the overall expenditure (OE) incurred for the qualifying intangible asset.

The amount of qualifying profit can be derived through the application of the following formula:

Where:

- Overall Income (OI)
  Overall income is defined as the gross income earned from qualifying intangible assets during the tax year, minus any direct costs incurred for generating the income.
  Overall income includes, but is not limited to:
  - royalties or other amounts resulting from the use of qualifying intangible assets
  - license income for the operation of qualifying intangible assets
  - any amount received from insurance or as compensation in relation to qualifying intangible assets
  - income from the disposal of qualifying intangible assets, excluding profits of a capital nature
  - embedded income of qualifying intangible assets arising from the sale of products or services, or from the use of procedures that are directly related to the assets
  On calculating overall income, direct costs include as following:
  - all costs incurred, either directly or indirectly, wholly and exclusively for the purpose of earning the income from qualifying intangible assets
  - the amortization of the cost of the assets
  - notional interest on equity contributed to finance the development of the assets (being a notional interest tax deduction allowed by Cyprus tax provisions)

- Qualifying Expenditure (QE)
  Qualifying expenditure for qualifying intangible assets is defined as the sum of all R&D costs incurred during any given tax year wholly and exclusively for the development, improvement or creation of qualifying intangible assets, and which costs are directly related to such assets.
  Qualifying expenditure includes, but is not limited to:
  - wages and salaries
  - direct costs
  - general expenses relating to installations used for R&D
  - commission expenses associated with R&D activities
  - costs associated with R&D activities that have been outsourced to non-related persons
  Even so, qualifying expenditure does not include:
  - costs for acquisition of intangible assets
  - interest paid or payable
  - costs for acquisition or construction of immovable property
  - amounts paid or payable directly or indirectly to a related person to conduct R&D activities, regardless of whether such amounts relate to cost sharing agreements
  - costs which cannot be proved directly connected to a specific qualifying intangible asset
  Any expenditure for R&D that has been outsourced to non-related parties, as well as any expenses of a general nature for R&D, which can not be allocated to the qualifying expenditure of a specific qualifying intangible asset, can be apportioned pro rata to the qualifying intangible assets

- Uplift Expenditure (UE)
  An uplift expenditure is added to the qualifying expenditure, which will be equal to the lower of:
  - 30% of the qualifying expenditure
  - the total cost of acquisition of the qualifying intangible assets, plus the cost of outsourcing to related parties of any R&D activities in relation to such assets
- Overall Expenditure (OE)
  Overall expenditure relating to qualified intangible assets is defined as the sum of:
  - the qualifying expenditure
  - the total cost of acquisition of the qualifying assets, plus the cost of outsourcing to related parties of any R&D activities in relation to these assets, incurred during any tax year

Accounting Records

Persons claiming benefits under the new regime are obliged to maintain proper books of account, as well as records of income and expenses for each intangible asset.

Non-Qualifying Assets For The IP Box Regime

Expenditure for the acquisition of an intangible asset that does not qualify for the transitional provisions, and which asset is used in furtherance of the business, can be amortized over the asset’s useful life, in accordance with accepted accounting principles, with a maximum period of 20 years.

A balancing statement needs to be prepared in case where the asset is disposed, similarly to cases of disposal of fixed assets. It is of a high importance to be noted that goodwill does not qualify for amortization.

PRACTICAL EXAMPLES

To put things in perspective, we set out some numerical examples illustrating how, under the new IP regime, one would reach the QP stage on which 80% notional deduction would be applied.

The major factors in the examples are:

Whether the asset was internally developed or whether it was acquired.
Whether R&D costs were outsourced to related parties or to third parties.

The following cases will be examined:

Case 1

The asset was acquired, with subsequent R&D costs for improvements being outsourced to related parties.

Case 2

The asset was acquired, with subsequent R&D costs for improvements of the asset being were outsourced to non-related parties.

Case 3

The asset was developed or improved internally, with R&D costs being undertaken by the company itself.

For the purposes of the examples, the following figures are used:

	Case 1	Case 2	Case 3
Overall Income (OI) from qualifying IP	€1,000,000	€1,000,000	€1,000,000
Cost of acquisition of asset	€300,000	€300,000	N/A
R&D costs, incurred internally	N/A	N/A	€500,000
R&D costs, outsourced to non-related parties	N/A	€200,000	N/A
R&D costs, outsourced to related parties	€200,000	N/A	N/A
Overall Expenditure (OE)	€500,000	€500,000	€500,000
R&D costs, incurred internally	N/A	N/A	€500,000
R&D costs, outsourced to non-related parties	N/A	€200,000	N/A
Qualifying Expenditure (QE)	N/A	€200,000	€500,000
30% of the qualifying expenditure	0	€60,000	€150,000
Total cost of acquisition + cost of outsourcing to related parties	€500,000	€300,000	0
Uplift Expenditure (UE)	0	€60,000	0
Qualifying Profit (QP) QP = OI* [(QE+UE)/OE]	€0 €1,000,000 x [(€0 + €0) / €500,000]	€520,000 €1,000,000 x [(€200,000 + €60,000) / €500,000]	€1,000,000 €1,000,000 x [(€500,000 + €0) / €500,000]
Notional Deduction (80% of QP)	€0	€416,000	€800,000
Effective Tax Rate (ETR)	12.5%	7.3%	2.5%

Case 1

The asset was acquired, with subsequent R&D costs for improvements being outsourced to related parties.

Overall Income (OI) from qualifying IP
€1,000,000

Cost of acquisition of asset
€300,000

R&D costs, incurred internally
N/A

R&D costs, outsourced to non-related parties
N/A

R&D costs, outsourced to related parties
€200,000

Overall Expenditure (OE)
€500,000

R&D costs, incurred internally
N/A

R&D costs, outsourced to non-related parties
N/A

Qualifying Expenditure (QE)
N/A

30% of the qualifying expenditure
0

R&D costs, outsourced to non-related parties
€500,000

Uplift Expenditure (UE)
0

Qualifying Profit (QP)
QP = OI* [(QE+UE)/OE]
€0
€1,000,000 x [(€0 + €0) / €500,000]

Notional Deduction (80% of QP)
€0

Effective Tax Rate (ETR)
12.5%

Case 2

The asset was acquired, with subsequent R&D costs for improvements of the asset being were outsourced to non-related parties.

Overall Income (OI) from qualifying IP
€1,000,000

Cost of acquisition of asset
€300,000

R&D costs, incurred internally
N/A

R&D costs, outsourced to non-related parties
€200,000

R&D costs, outsourced to related parties
N/A

Overall Expenditure (OE)
€500,000

R&D costs, incurred internally
N/A

R&D costs, outsourced to non-related parties
€200,000

Qualifying Expenditure (QE)
€500,000

30% of the qualifying expenditure
€60,000

R&D costs, outsourced to non-related parties
€300,000

Uplift Expenditure (UE)
€60,000

Qualifying Profit (QP)

QP = OI* [(QE+UE)/OE]
€520,000

€1,000,000 x [(€200,000 + €60,000) / €500,000]

Notional Deduction (80% of QP)
€416,000

Effective Tax Rate (ETR)
7.3%

Case 3

The asset was developed or improved internally, with R&D costs being undertaken by the company itself.

Overall Income (OI) from qualifying IP
€1,000,000

Cost of acquisition of asset
N/A

R&D costs, incurred internally
€500,000

R&D costs, outsourced to non-related parties
N/A

R&D costs, outsourced to related parties
N/A

Overall Expenditure (OE)
€500,000

R&D costs, incurred internally
€500,000

R&D costs, outsourced to non-related parties
N/A

Qualifying Expenditure (QE)
€500,000

30% of the qualifying expenditure
€150,000

R&D costs, outsourced to non-related parties
0

Uplift Expenditure (UE)
0

Qualifying Profit (QP)
QP = OI* [(QE+UE)/OE]

€1,000,000
€1,000,000 x [(€500,000 + €0) / €500,000]

Notional Deduction (80% of QP)
€800,000

Effective Tax Rate (ETR)
2.5%

Get professional advice on how your business can benefit from IP Box Regime in Cyprus

HOW WE CAN HELP

We represent a group of entrepreneurs and legal advisers experienced in practical use of Cyprus IP Box Regime legislation. Our aim is to help companies and founders to take advantage of modern tax rules while generating intellectual property rights in Cyprus.

We can review your current situation and provide legal advice on how to improve the business structure for getting benefit from reduced corporate tax rate. The group of professionals can handle the tax compliance and track your IP calculations in line with relevant regulations to determine timely IP related deductions.

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CYPRUS IP BOX REGIME

WHAT IS IP BOX REGIME?

HISTORY OF IP BOX REGIME

PRINCIPAL FEATURES OF IP BOX REGIME IN CYPRUS

THE KEY DIFFERENCES BETWEEN COUNTRIES APPLYING IP BOX REGIME​

IP BOX COMPARISON SUMMARY

RATIFICATION OF ALL MAJOR IP TREATIES​

HOW TO APPLY FOR IP BOX?

NEXUS FRACTION IN IP BOX REGIME

PROVISIONS OF THE NEW CYPRUS IP BOX REGIME

PRACTICAL EXAMPLES​

HOW WE CAN HELP

CONTACT US

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PRINCIPAL FEATURES OF IP BOX REGIME
IN CYPRUS

THE KEY DIFFERENCES BETWEEN COUNTRIES APPLYING IP BOX REGIME

RATIFICATION OF ALL MAJOR IP TREATIES

PRACTICAL EXAMPLES