As of July 1st 2021, the previous IP Box Regime is abolished and a new regime is now in force.
Under the new Cyprus IP Box Regime, 80% of the qualifying profits generated from the qualified assets (hereinafter ‘QA’) is deemed to be a tax-deductible expense for qualifying taxpayers, resulting in an effective tax rate of as low as 2.5%
It is noted that in calculating the qualifying profits, the new regime adopts the ‘’Nexus approach’’. According to the Nexus approach, the level of the qualifying profits is positively related to the extent the claimant performs R&D activities to develop the QA within the same company.
Qualifying Assets under the new Regime include patents and patent equivalents, copyrighted software programmes, etc. Qualifying assets do not include trademarks, copyrights, image rights and any other IPs relating to marketing.
Qualifying person includes Cyprus tax resident taxpayers, tax resident Permanent Establishments (PEs) of non-tax resident persons as well as foreign PEs that are subject to tax in Cyprus.
Qualifying profits are calculated in accordance with the Nexus fraction. The Nexus fraction is used to determine the amount of qualifying profits that will give the relevant deduction to the taxpayer.
OI × (QE+UE)/OE
Where: OI: Overall Income derived from the QA, QE: Qualifying Expenditure on the QA, UE: Uplift Expenditure on the QA, OE: Overall expenditure on the QA.
Cumulative nexus fraction: the nexus approach is an additive approach; the calculation requires both that QE includes all qualifying expenditures incurred by the taxpayer over the life of the IP asset and that OE includes all overall expenditures incurred over the life of the IP asset.
Losses from the qualifying assets: Where the calculation of qualifying profits results in a loss, only 20% of this loss may be carried forward or group relieved.
Income from non-qualifying intangible assets: Income arising from non-qualifying intangible assets that are used in the business, can still benefit from certain provisions of the Cyprus tax law. In particular, capital allowances and/or notional interest deduction (NID) may be available to be deducted from such income, which should help reduce the overall effective tax rate of the company. Examples of such intangible assets include trademarks, copyrights and other IP assets.
Notional Interest Deduction (NID): NID may be available on assets introduced in a Cyprus company through equity which are employed in the production of taxable income.
Example:
Assuming that 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:
| 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 |
| Total cost of acquisition + cost of outsourcing to related parties | 0 |
| Up-lift Expenditure (UE) | 0 |
| PR= OI × (QE+UE)/OE | Qualifying Profit (QP) | Notional Deduction (80% of QP) |
| €1,000,000 x [(€500,000 + €0) / €500,000] | €1,000,000 | €800,000 |
By applying the above figures to the formula for calculation of the Qualifying Profit (QP) and the tax benefit of up to 80% as a notional deduction, we receive the following:
As a result, the IP Tax benefit shall be: Taxable profit will be decreased by €800,000 notional expense – 2.5% effective corporate tax rate.
How we can help
ConnectedSky Legal & Corporate Consultants Limited, through its dedicated team of business consultants, accountants, lawyers, and tax experts will be happy to advise any client as to the new IP Box Regime and its benefits.
Contact us:
Tel: +357 22 258800
Fax: +357 22 258801
E-Mail: [email protected]
