What is IP box regime in Cyprus

Intellectual activity is one of the most profitable and promising industries today. In the new millennium, the intangible sector has managed to stand shoulder to shoulder with industry not only in terms of growth rate but also in profitability and capital deepening. Like any other activity, intellectual property income is taxed, and there is already something to think about.

Because of the profitability and prospects of this industry, many jurisdictions are introducing flexible fiscal rates for intellectual property owners. Cyprus has a special place in this area offering an advantageous taxation policy. The IP regime Cyprus program was developed by the government to stimulate intellectual property companies and provided significant tax breaks that effectively exempt 80 percent of the profits of such enterprises from taxation.

Actually, Cyprus has all the necessary resources for the development of enterprises specializing in the sale of intellectual property, as follows:

• Developed banking system.
• EU legal protection.
• The opportunity to enter the world markets.
• Highly qualified employees.

The development of intellectual property is not among the highly competitive industries in Cyprus, so interested businessmen have every chance to expand their business on an international scale facilitating by the IP box regime Cyprus.

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What is IP box regime in Cyprus

IP Box Regime (known also as a patent box, innovation box or IP box) – is a corporate tax regime, used by several countries to incentivize research and development activities which concludes in lower taxes, by taxing revenues deriving from a license, sublicense, sale or transfer of qualified IP assets, way differently compared to other commercial revenues.

Basically, the island doesn’t have any mineral resources and large industry, so the increase in the number of large IT companies is an ideal solution for a service-oriented economy. Cyprus offers some of the lowest levels of taxation for intellectual property in the entire European Union. And if the intellectual products before included exclusively books, art, movies, audio recordings, and other cultural media, now the patents of inventions, trademarks, software, author’s design, were added. Any of these industries does not have any requirements for the place or resources so that each entrepreneur can choose a suitable business location for the company. The specific of the information services market allows working with customers from worldwide taking advantage of all the attractive taxation privileges.

The first tax changes for the intellectual property owners in Cyprus happened in 2012. These included significantly lowering taxes to stimulate investment in this area. The program was promoted under the name Intellectual Property rights box (IP box). The French IP box model was used as the prototype for the Cyprus project. The model implied the reduced level of taxation on revenue generated by the sale of intellectual property rights. However, Cypriots went further than their French colleagues. Under the Cyprus IP box regime program, instead of lowering the rate of tax, the Government of Cyprus reduced the tax base, exempting 80% of the income received from payments.

As it is known, the corporate income tax in Cyprus is 15% and accrues 100% of net profit. In the case of intellectual property rights holders, only 20% of income is taxed. Therefore, the effective tax rate is reduced from 15% to 2.5% for them. And this figure is noticeably lower than in other European countries (e.g. 15% in France, 10% in Great Britain, 7% in the Netherlands).

Benefits of the Cyprus IP Box Regime

The taxation program for intellectual property entities in Cyprus is one of the most flexible and loyal in the EU. Island officials have introduced a number of concepts specifying the categories of assets subject to a tax deduction for a better understanding of the IP box regime program.

• The qualifying intangible assets. They include assets that have been bought or developed by the company and are directly involved in the business development and operations (except for intellectual assets related to marketing systems and projects). They should be the result of research and generate income for their owners.
• Current intangible assets. They include patents, permits, software, etc. Current intangible assets should also be involved in the day-to-day operations of the company, but the gross income generated by their application should not exceed 7.5 million Euros or 50 million for holding companies.

Differences between countries applying IP box regime​

	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
Limitations on Where R&D Takes Place	Some	Some	None	None	Some	None	None
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
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

It should be noted that under the latest Cyprus tax regime amendments, brand names, trademarks, and other rights are not intangible assets and, accordingly, companies using them are not entitled to tax relief. Intellectual property revenue under the IP box program may include:

• Licensing income and insurance payments.
• Royalties and other income from the use of qualifying intangible assets.
• Capital gains resulting from the disposition of intangibles.

Other cash revenue arising from the use of intangible resources in business may also be included in the list.

Businesses participating in the IP box tax program, like all other Cypriot companies, are required to file regular reporting data to the Cyprus tax department. In general, reporting procedures are not different from all other companies, except for a few points:

• Income and expenses should be accounted for in the context of each intangible asset.
• The cost of acquiring an intangible asset that does not meet the requirements of the IP box program can be depreciated over its useful life which is up to 20 years by island standards.
• In the case of the sale of such an asset, its disposal may be taken into account in the same way as the disposal of fixed assets.

Also, it should be recalled that Cyprus has a whole network of double taxation agreements. In addition to reducing the fiscal pressure for businesses with economic interests outside Cyprus, they include the regular exchange of tax data on motivated requests from tax authorities. Moreover, the island actively implements the Common Reporting standards in its fiscal practice. They imply the automatic exchange of tax data with the countries participating in the project on an annual basis.