Cyprus IP Box Regime: Intellectual Property (IP) Services

About ‘Intellectual Property’ (IP)

01

Intellectual Property (IP) rights can be one of the most valuable assets of an individual or an organisation. Using and understanding IP rights, enables companies to secure competitive advantages, generate revenue streams, facilitate access to financing, attract investors and partners, avoid and mitigate relevant risks, and potentially reduce tax liabilities.

02

Choosing the right location for the centralisation and management of IP is an important commercial decision. The Cyprus IP Box Regime is a tax incentive mechanism, designed to encourage research and development activities in Cyprus.

03

Cyprus offers significant tax benefits because 80% of qualifying profits are exempt from tax, while the remaining 20% of the IP income is taxed at the corporate tax rate of 15%, delivering effective tax rates as low as 3%.

04

Cyprus refined its IP Box tax model in 2016 to align with OECD’s Base Erosion and Profit Shifting (BEPS) Action 5, ensuring both competitiveness and compliance with international developments. It has been reviewed by the Code of Conduct Group (Business taxation) and assessed as fully compatible with EU standards.

05

All EU directives and regulations relating to IP apply in Cyprus. Cyprus has also ratified all the key conventions and protocols protecting IP rights and offers full legal protections to international clients. As well as a highly competitive tax regime, Cyprus offers an extensive network of Double Taxation Agreements (DTAs) for licensing and franchising arrangements.

Key features of the Cyprus IP Box regime

The Cyprus ‘IP Box’ regime was first introduced in 2012 to encourage foreign investment by providing for favourable tax treatment in relation to income generated from any type of IP rights, patents and trademarks, as well as providing for generous capital allowances for the acquisition and development of such rights.

In 2016, Cyprus passed amendments to its Income Tax Law to align the IP Box Regime with the OECD BEPS Action 5 by introducing the ‘modified nexus approach’. This requires companies to demonstrate a clear and direct link between the qualifying R&D activity that led to the creation of their patented inventions or other qualifying IP rights, and the profits that are eligible for relief under the IP Box regime, but also allows related party outsourced expenditure, and any IP acquisition costs, to be taken into account.

To evidence that the asset is ‘qualifying IP’, the Cyprus entity must be able to demonstrate that:

The IP was developed or enhanced either internally or via unrelated contractors.
It owns the economic rights to the IP.
The IP is protected under copyright law (registered or inherently copyrighted).

Eligible entities under the Cyprus IP Box regime include Cyprus tax residents, Cyprus permanent establishments (PEs) of non-Cyprus tax resident entities and PEs of overseas entities that are liable to tax in Cyprus.

Qualifying Assets under the Cyprus IP Box

The Cyprus Income Tax Law (Article 9(1)(k)) defines a ‘qualifying intangible asset’ as an asset that was acquired, developed or exploited by a person within the course of carrying out business, which is the result of research and development (R&D) activities, and which includes intangible assets for which only economic ownership exist.

Qualifying intangible assets comprise include:

Patents.
Copyrighted software.
Utility models that grant protection to plants and genetic material, orphan drug designations and extensions of patent protection.
Other IP that is non-obvious, useful and novel, and has been certified as such by a designated authority, and where the five-year average annual gross revenues from all intangible assets do not exceed €7.5 million for a single taxpayer or €50 million for a group.

Marketing-based IP assets, such as trademarks, brand names, image rights, customer lists, marketing intangibles, as well as any franchise or licensing fees primarily for brand use or know-how that is not R&D-based, are specifically excluded from the Cyprus IP Box regime.

Tax benefits under the Cyprus IP box regime

The Cyprus IP Box regime offers an 80% income tax exemption for income generated from qualifying intangible assets owned by Cypriot resident companies, net of any direct expenses. The remaining 20% is then subject to the standard corporation tax rate of 15%, to give an effective tax rate of 3%.

Qualifying profit (QP) is defined as the proportion of the Overall Income (OI) derived from the qualifying IP assets, 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.

Overall qualifying income is the gross income earned from qualifying intangible assets during the tax year, minus any direct costs incurred for generating the income. OI includes, but is not limited to:

Royalties or other amounts resulting from the use of qualifying IP assets.
Licence income for the operation of qualifying IP assets.
Any amount received from insurance or as compensation in relation to infringements of qualifying IP assets.
Income derived from the disposal of qualifying IP assets, excluding profits of a capital nature which are not subject to taxation in Cyprus.
Embedded income of qualifying IP assets arising from the sale of products or services, or from the use of procedures that are directly related to the assets.

To calculate OI, direct costs include:

All costs incurred, either directly or indirectly, wholly and exclusively for the purpose of earning the income from qualifying intangible assets.
The amortisation of the cost of the assets.
Notional interest on equity contributed to finance the development of the assets under the provisions of the Cyprus Notional Interest Deduction (NID).

Qualifying Expenditure (QE) for qualifying intangible assets is defined as the total expenditure incurred during any given tax year wholly and exclusively for the development, improvement or creation of qualifying intangible assets, including:

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 that has been outsourced to non-related persons.

QE 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 even if they relate to cost sharing agreements, or costs that cannot be proved directly connected to a specific qualifying IP 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 that cannot be allocated to the QE of a specific qualifying intangible asset, can be apportioned pro rata to the qualifying intangible assets.

Uplift Expenditure (UE) is added to the QE, which will be equal to the lower of 30% of the QE or the total cost of acquisition of the qualifying IP assets, plus the cost of outsourcing to related parties of any R&D activities in relation to such assets.

IP owners 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.

Additional tax advantages of the Cyprus IP regime

It is important to note that the Income Tax Law was amended in 2020 to clarify that any unused tax depreciation, and the right to claim such depreciation, for any expenditure incurred in the acquisition or development of an intangible asset can be carried forward. The carried-forward tax depreciation can be claimed by the taxpayer as additional tax depreciation during the remaining useful life of the asset, with a maximum period of 20 years. This can lower the effective tax rate to less than 3%.

The amendment further provided that the obligation to prepare a balancing statement upon a transfer/sale of an intangible asset was abolished. As a result, if a disposal of intangible IP assets is a capital nature transaction then the resulting capital gain should not be taxable in Cyprus. This allows IP owners in Cyprus to enjoy tax benefits on the income generated from the use of such rights and also to access a tax efficient exit route in future.

Companies developing qualifying IP in Cyprus can also benefit from the 120% R&D super-deduction for qualifying expenditure incurred during the development phase. They can then claim under the IP Box regime on the income generated once the IP is commercialised.

Cyprus has an extensive network of more than 65 double tax treaties worldwide, which allows for wide-ranging profit repatriation opportunities. When combined with the use of Cyprus companies and the IP regime, positions Cyprus as an ideal IP holding jurisdiction.

To remain compliant with the IP Box conditions and enjoy substantial tax benefits, IP owners should ensure that:

Substance is maintained in Cyprus – management and control, core income generating activities (CIGA) and adequate presence.
R&D activity or enhancement is undertaken in Cyprus.
IP Box nexus file evidencing qualifying and non-qualifying costs is maintained annually.
Transfer pricing documentation is provided to support royalty rates and IP acquisition prices.
Timely filing of tax return and IP Box computation is maintained.

Sovereign IP Services

Sovereign Trust (Cyprus) can provide cost effective advice to clients on the acquisition, exploitation, use and enforcement of IP rights on both a domestic and cross-border basis. We can also provide strategic advice on tax efficient IP structuring to both established and developing companies.

Companies that own or are in the process of developing a substantial amount of IP should consider establishing an IP holding company, a special purpose vehicle whose sole function is to hold and manage a company IP portfolio. Typically, an IP holding company does not directly use the IP but will instead license the IP rights to operating companies for their use.

Consolidating all a company’s IP assets into one IP holding company can provide a number of benefits, including administrative convenience in IP maintenance and enforcement, more efficient transaction structures, and potential tax efficiencies.