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IP BOX mode in Cyprus
Cyprus is an ideal place for companies whose profits are generated by the ownership of the disposal of intellectual property rights, intellectual property objects.
Special Regime in Cyprus (IP BOX)
IP BOX regime (also known as Patent Box, Innovation Box) is a special regime adopted and approved by law in Cyprus. Due to the rapid development of new technologies in the world and the need to introduce innovative solutions in industry, in various areas of modern industry, in the field of IT technologies, support and development of the institute of intellectual property itself, governments around the world have adopted new tax optimization measures to enable the development of the system of intellectual property rights and their protection in their countries which makes it much easier for businesses to invest in the development of new technologies, new startups and businesses, It leads to accelerated economic development in these countries, to the creation of new jobs, develops and maintains a high level of investment climate in the country and the inflow of investments. In turn, the result is the registration or migration of IP companies to those countries where the income tax rates for such companies (for this type of activity) are set at a fairly low level, and thus the best conditions for the development of this business are created. At the same time, this pushes investors to invest all new funds, i.e. invest in such companies, and get the greatest and most profitable economic effect from it, save on paying income tax in a legal way. Thus, IP BOX is a special preferential tax regime with a reduced income tax rate for IP companies.
Choosing the right location
Intellectual Property (hereinafter referred to as "IP") it can be and in most cases is one of the most valuable assets of the company. Choosing the right location for IP centralization and management is a very important strategic business decision. An ideal place to establish an IP structure is an important step that can serve the development of a company's business strategy/model, the protection and protection of its IP, as well as significant and smart tax optimization.
IP-covers a wide range of intangible assets, including (but not limited to) copyrights, which may be in the form of literary works, dramatic works, musical works, scientific works, artistic works, sound recordings, films, radio broadcasts, published publications, databases, publications, software products, etc. IP it also includes patented inventions, trademarks (service marks), designs and models that are used or applied in goods, products and technologies, etc. And this list is not exhaustive.
Cyprus mode – IP BOX.
In May 2012, the Government of Cyprus adopted and approved new provisions of tax legislation, which, among others, included a package of incentives and tax benefits related to income from intellectual property rights aimed at stimulating investment in research and development, new rules of preferential taxation for IP companies resident in Cyprus were adopted and approved. The amendments that were made to the tax legislation of Cyprus were retroactive, and entered into force on January 1, 2012.
These innovations in Cyprus tax law have also extended to all expenses of companies for the acquisition or development of intangible assets. At the same time, the registered intellectual property objects do not need to be registered specifically in Cyprus to register IP companies, and to benefit from the IP BOX mode in Cyprus. After the introduction of these amendments to the tax law of Cyprus, Cyprus currently (practice confirms this) offers one of the most effective IP tax regimes of the European Union (EU), related to the protection provided by the EU member states and signatories of all major treaties and protocols on intellectual property of the European Union. In Cyprus, the IP BOX regime is implemented by exempting a certain share of the company's income from taxation.
IP companies in Cyprus – Tax and other advantages
The EU Directive (On Interest and Royalties) and the Rules concerning the protection of intellectual property in the EU have been fully incorporated into the national legislation of Cyprus. As a result, when registering an IP company in Cyprus, intellectual property rights that belong to a Cyprus resident company receive full protection in all EU member states, as well as those states that have signed all major IP agreements and protocols.
The amendments adopted in 2012 provide for the exemption of companies from paying corporate tax on IP-related income. What exactly is meant by :
- 80% of global income in the form of royalties generated from IP owned by a Cyprus resident company (net of any direct costs*) is exempt from income tax in Cyprus;
- 80% of the profit received from the sale (rental) of IP rights owned by a Cyprus resident company (net of any direct costs *) is exempt from income tax in Cyprus.
- Any capital expenditures for the acquisition of IP rights and/or the development of IP facilities are expensed and for profit reduction in the year in which such expenses were incurred and for the next four (4) years after the year of acquisition (purchase).
All of the above tax benefits are applicable to intellectual property acquired by the company or developed before January 1, 2012.
What are the benefits of income tax received by a Cyprus resident company from the application and use of the IP BOX mode?
In general, the general corporate income tax rate in Cyprus is set at 12.5% for companies. The amount subject to taxation in accordance with the IP BOX tax rules is calculated by writing off reserves and deducting expenses (including interest) to finance the acquisition or development of IP assets and any other direct expenses from the income received, and dividing the amount received by five. As a result of the application of the provisions of the tax IP Box regime, the corporate income tax rate of 12.5% gives an effective rate of this tax for companies in the amount of 2.5% or less of net profit.
The IP Box tax rate of 2.0- 2.5% in Cyprus directly competes with other EU jurisdictions when applying the IP BOX regime, namely: for example, the IP BOX regime of the United Kingdom of Great Britain (UK) gives an effective income tax rate of 10% of the corresponding income. The Irish IP Box scheme, introduced in 2015, is more complex and it is not possible to directly compare the results of its application, but the effective rate in Ireland under the IP Box regime is close to the British one today. The advantages of the IP BOX tax regimes of Luxembourg and the Netherlands are to some extent better, but their effective rates are 5.76% and 5%, respectively, and both of them, in our opinion, are significantly less profitable than in Cyprus. Moreover, with the closure in Ireland (the actual legislative ban) of the well-known “Double Irish with Dutch Sandwich” scheme, many global companies began to think about where to transfer the IP of the company after the expiration of this scheme (companies that had previously issued the application of this scheme (for example, Apple, Google) used it until the end of 2020).
Significant tax savings can be achieved due to the fact that a Cyprus resident company and IP owner grants IP usage rights directly to end users, eliminating (or at least reducing) tax from a source in foreign jurisdictions by applying the provisions of a wide network of Cyprus Double Taxation Agreements with other countries, or using the provisions of the EU Directive "On Interest and Royalties", which provides a uniform tax regime for interest and royalties paid by resident companies within the European Union.
The IP Box tax regime rules introduced by Cyprus in 2012 have increased the legal and jurisdictional protection of IP rights holders, as well as the investment attractiveness of Cypriot companies, given that legal and corporate issues of IP structure management in Cyprus are regulated by the legislation of the Republic of Cyprus and EU Directives, providing an increased level of legal certainty, asset protection and predictability.
The wide network of Cyprus tax agreements on the avoidance of double taxation, as well as the application of the provisions of the EU Directive "On Interest and Royalties", are additional means of protection to achieve maximum tax optimization when it comes to the operation of the IP Box regime in Cyprus.
The adoption by the Parliament of Cyprus in 2020 of a new provision on exemption from income tax on income from the sale of intangible assets (in the form of a capital operation) was progressive. Namely, on July 17, 2020, the House of Representatives of Cyprus approved a bill to amend Section 9(1)(l) of the Income Tax Law, which introduced a number of changes regarding the tax regime of intangible assets. In particular, if the disposal of intangible assets is a capital transaction, then the resulting capital gain should not be taxed. The changes came into force on January 1, 2020, and the obligation to prepare a balance sheet when transferring or selling an intangible asset was abolished.
Cyprus Double Taxation Treaties and Agreements
Cyprus currently has more than 60 existing bilateral treaties and Agreements with other countries on the avoidance of double taxation. The current list of Agreements can be viewed on the website of the Ministry of Finance of Cyprus at the link below:
http://mof.gov.cy/en/taxation-investment-policy/double-taxation-agreements/double-taxation-treeties
Cyprus is a party to many International Conventions on the Protection of IP Rights
Cyprus is a party (signatory) to the following International Conventions and Treaties related to the Protection of Intellectual Property Rights :
- EC Regulation on the Community Trademark (CTM) (http://www.wipo.int/wipolex/ru/text.jsp?file_id=162995)
- Convention Establishing the World Intellectual Property Organization (WIPO) (http://www.wipo.int/treaties/en/convention/)
- The Madrid Agreement Concerning the International Registration of Marks (Madrid Agreement, MMA) and Protocol to the Madrid Agreement (http://www.wipo.int/treaties/en/registration/madrid/)
-The Patent Cooperation Treaty (PCT) (http://www.wipo.int/pct/en/texts/articles/atoc.htm )
- Berne Convention for the Protection of Literary and Artistic Works (http://www.wipo.int/treaties/en/ip/berne/)
- Paris Convention for the Protection of Industrial Property (http://www.wipo.int/treaties/en/text.jsp?file_id=288514)
- Geneva Convention for the Protection of Producers of Phonograms Against Unauthorized Duplication of their Phonograms (http://www.wipo.int/treaties/en/ip/phonograms/);
- WIPO Performance and Phonograms Treaty (WPPT) (http://www.wipo.int/treaties/en/ip/wppt/);
- Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations (http://www.wipo.int/treaties/en/text.jsp?file_id=289757);
- Trademark Law Treaty (http://www.wipo.int/treaties/en/ip/tlt/) ;
- WIPO Beijing Treaty on Audiovisual Performances (http://www.wipo.int/treaties/en/ip/beijing/).
This information is not a consultation and is posted only for your information. If you need advice on the tax regime , we recommend contacting tax consultants and auditors to get professional tax advice from a tax specialist . We can help you in this matter - find good tax consultants in Cyprus.