Cyprus is home to a robust and attractive intellectual property (IP) regime that offers a comprehensive framework for protecting and managing IP assets, including patents, trademarks, designs, and copyrights.
The country’s IP laws are fully compliant with international standards and are designed to provide strong and effective protection to IP owners.
Intellectual Property (IP) can be one of the most valuable assets of an Organisation. Choosing the right location to setup your IP holding company is a very important business decision.
Cyprus offers one of the most efficient IP tax regimes in Europe coupled with the protection afforded by EU Member States and by the signatories of all major IP treaties and protocols.
Cyprus IP Box Regime
The Cyprus IP Box regime is a tax incentive program offered by the Cyprus government to companies that own and exploit qualifying intellectual property (IP) assets. The new Cyprus IP Box regime was introduced on July 1st, 2016, and provides a reduced tax rate on income generated from qualifying IP assets, with the aim of promoting innovation and research and development (R&D) activities in Cyprus.
The Cyprus IP Box regime offers several benefits for companies that own and exploit qualifying IP assets.
- Reduced tax rate: Companies with income generated from qualifying IP assets can achieve an effective tax rate of 2,5% (or less) on qualifying profits earned from exploiting qualifying IP, compared to the standard corporate tax rate of 12.5%. This can result in significant tax savings for companies that own and exploit qualifying IP assets, boosting their profitability and competitiveness.
- Increased profitability: The reduced tax rate on income generated from qualifying IP assets can help companies to increase their profitability and reinvest in further innovation and growth. This can enable companies to expand their business operations, develop new products and services, and enter new markets, enhancing their long-term success and profitability.
- Improved cash flow: The reduced tax rate on income generated from qualifying IP assets can also help to improve cash flow for companies, as they are able to retain more of their earnings. This can provide companies with greater financial flexibility and enable them to pursue new opportunities and investments.
- Encourages innovation and R&D: The IP Box regime is designed to encourage innovation and research and development (R&D) activities in Cyprus. By providing a financial incentive for companies to invest in innovation and R&D, the regime can help to foster a culture of innovation and support the development of new technologies and products.
- Access to international markets: The reduced tax rate on income generated from qualifying IP assets can also help companies to access international markets, as they are able to offer their products and services at a more competitive price. This can enable companies to expand their business operations and enter new markets, driving growth and profitability.
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Enhances competitiveness: Companies that own and exploit qualifying IP assets can benefit from a competitive advantage, as they are able to protect their intellectual property and generate income from the exploitation of their IP assets. This can help to enhance the competitiveness of these companies and position them for long-term success.
Benefits of a Cyprus IP Company
- An 80% exemption on profits derived from the sale of IP assets.
- An 80% exemption on the net profits derived from the use of IP assets.
- No recapture system for previously generated losses – losses can be carried forward for up to five years.
- Gross IP income reduced by all direct expenses incurred wholly and exclusively for the production of IP income.
- Competitive tax amortisation provisions over a five year period (i.e. 20% per annum).
- Wide range of qualifying IP assets, including internally developed IP assets.
- Effective Tax rate of 2.5% or less.
- No withholding taxes on payment of royalties when distributed out of Cyprus, provided that the holder is not a Cyprus resident and the royalty is used outside of Cyprus.
- Tax is only paid on the license fee retained by the Cyprus company.
- Cyprus has an extensive worldwide network of double tax treaties.
- The EU Directive on Interest and Royalties providing for nil withholding taxes between EU countries and which extends also to Cyprus.
- Cyprus corporate tax rate is at 12,5 percent, the lowest within the EU.
- The license fee retained by the onshore intermediary company will typically be 5 percent.
Qualifying IPs
- Patents.
- Copyrighted software.
- Other IP assets that are legally protected, which are either: a. utility models, IP assets that grant protection to plants and genetic material, orphan drug designations and extensions of patent protection. b. Other non-obvious, useful, and novel IPs (subject to conditions).
Qualifying Profits (non exhaustive)
- Royalty income emanating from IPs.
- Embedded IP income in products/services.
- Trading gains on disposal of the IP.
- The higher the amount of R&D undertaken by the person itself (directly, through a taxable foreign branch or outsourced to third parties), the higher the amount of income qualifying under the new IP Box .
OPERATIONAL EXAMPLE
Assume that a Cyprus IP company licenses its IP to its operating foreign Companies and in return it receives royalty income of €1.000.000 per year.
The expected annual tax for the Cyprus IP Company will be as follows:
- Annual royalty income: €1.000.000
- Direct expenses: €200.000
- Net income: €800.000
- 80% deemed deduction: €640.000
- Taxable income: €160.000
- @12.5% Income tax: €20.000
- Effective tax rate: 2.5%
* Under the majority of Cyprus double tax treaties the withholding tax on royalty payments is 0%.