How the Cyprus IP regime can help you achieve effective tax planning
Intellectual Property (IP) is one of the most valuable assets of an organisation. Choosing the right location for the management of Intellectual Property is an imperative strategic business decision.
A) For Companies
The best location to establish an effective IP structure is one that can protect its intellectual property whilst serving the organisation’s business strategies and contributing to tax optimisation.
Cyprus has recently improved its Intellectual Property Tax System by introducing a significant 80% tax exemption on any IP related profit. This effectively renders Cyprus to be one of the most attractive locations for IP purposes within Europe and even globally.
The new Cyprus tax regime covers a wide range of intangible rights including, but not limited to:
- Copyrights © can take a number of the following forms: works of a literary, dramatic, musical or a scientific nature, recording, films, broadcasts, published editions, databases, software programs or publications.
- Inventions that are patented.
- Trademarks ™ and designs that can be used or applied on certain products.
Please note: In order for a Cyprus company to take full advantage of the scheme, the assets or IP rights must own them (also known as a royalty) either as a result of development or acquisition. However, there is no need for assets to originate or be registered in Cyprus.
Main Tax Benefits
The new Cyprus IP box has a number of main features:
- 80% of global royalty income produced from IP owned by local Cypriot companies (after all tax or charges have been paid) are excused from paying income tax.
- 80% of profit produced from the sale or disposal of IP from companies resident in Cyprus (after any tax or charges have been paid) are also excused from income tax.
- All expenditure of a capital nature for the acquisition or development of IP is claimed as a tax deduction during the year the spending took place including the following 4 years.
- All the above exemptions are also available for IPs acquired or developed before January 2012.
All the above points together with the wide double tax treaty network in Cyprus as well as having access to the EU Interest and Royalty Directive, can help any company achieve an effective tax structure.
Generally speaking, an effective tax rate of 2.5% is applied, which is the lowest rate between other jurisdictions offering similar schemes as demonstrated here:
|Approximate Effective Tax Rate|
If a Cyprus Intellectual Property company licenses its IP to any operating foreign companies and in return it receives royalty income of €200,000 per year.
The structure is as follows:
Example of the expected annual tax for the Cyprus Intellectual Property Company:
|Annual Royalty Income:||200|
|80% Deemed Deduction:||120|
|@ 12.5% Income Tax:||3.750|
*Direct expenses include, however are not limited to, costs to acquire or develop Intellectual Property and annual tax remuneration.
As per the majority of double taxation treaties in Cyprus, the withholding tax on royalty payments is currently 0% (subject to any requirements as per the national tax law in each jurisdiction).
The requirements of the IP Box regime are not applied in the case of back to back licensing arrangements. Consequently if a company licences a right from The Cayman Islands and pays €1,000 in royalties which in turn is sub-licenced to Russia, €1,110 will be taxed on €100 rather than 80% of €100.
The attainment of intellectual property rights by a Cyprus Company from anywhere in the world is classed as a service rendered to the company, effectively creating an obligation to register for VAT and to account for VAT on services received as per the reverse charge rule. No registration requirement will be generated if the IP right is established naturally as opposed to being purchased.
If the company charges royalty fees to taxable persons within the Eurozone it will also have to register for payment of VIES.
How we can help
- Intellectual Property related information.
- Cyprus holding structures for IP purposes.
- Corporate statutory compliance.
- Entitlement of tax devaluation.
- On-going assistance after initial set-up.
- The level of royalty that is owed.
Contact us for more information.
B) For Individuals
An exception to the provisions of the IP Box, which can provide tax exemptions of up to 80% on global royalty income and/or on profit generated from IP owned by Cypriot resident companies, the new tax law Ν.115(Ι)/2014, offers that any spending incurred by an individual for the purchasing of shares in innovative start-ups or SMEs can be deducted from their own taxable income.
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