On the 24th of May 2012, a package of tax incentives was voted by the House of Parliament of Cyprus aiming at stimulating economic growth. One of the areas for which measures have been taken relates to the intellectual property (IP) regime, in an effort to improve Cyprus' competitiveness in this area and boost inward investment in research and development.
Specifically, Article 9 of the Income Tax legislation has been amended to incorporate the following provisions, effective as from 1st of January 2012:
Expenditure incurred for the acquisition or development of intangible assets as set out in the Patent Law as amended, the Intellectual Property Rights Law as amended and the Trademarks Law as amended by a person carrying on a business is treated as tax deductible.
Qualifying IP rights include patents, trademarks, software, trade secrets, designs/models, internet domain names, secret formulae, know-how, work in process R&D, client lists, amongst others.
Such expenditure incurred for the acquisition or development of intangible assets may be capitalized and amortized on a straight line basis over five years commencing in the year of acquisition (i.e. 20% exemption p.a.).
80% of such profits (including any compensation for infringement) is treated as an expense and thus disregarded for tax purposes.
Taking this one step forward, profits earned by a Cyprus tax resident company (that are effectively generated out of royalty income) can then be distributed through dividends to non-Cyprus tax resident shareholders without any Cyprus tax being imposed.
80% of such profits is treated as an expense and thus disregarded for tax purposes.
Note that full exemption can be achieved by holding the intangible assets in a separate Cyprus tax resident company and disposing of the shares in that company, rather than the assets themselves. This is because gains on disposals of qualifying securities (incl. shares) are exempt from all forms of taxation in Cyprus (except if represented by immovable property situated in Cyprus which is not the case here).
The effective tax rate on the profit from exploitation or disposal of the intangible asset is 2.5%.
Note that profit, as mentioned above, is calculated after deducting the direct expenses incurred towards the production of the income from the exploitation or disposal of the intangible assets (i.e. amortization of the assets, interest costs of financing the acquisition or development of the assets and any other direct expenses).
The new regime will result in significant tax saving opportunities in that it will allow Cyprus tax resident companies to hold the IP asset and license the right to use to entities located in jurisdictions with which: (i) low WHT can be achieved either through the Cyprus' double tax treaty network or (ii) through the application of the EU Interest and Royalties Directive.
|Details: A Limited (Cyprus tax resident) - Year 1||€|
|Cost of acquisition of IP by A Limited||100,000|
|Expenditure for development of IP (capital nature)||20,000|
|Finance cost re the expenditure for development of IP||4,000|
|Other direct expenses||2,000|
|Income from the licensing of IP||40,000|
|Calculation of taxable profit for Year 1||€|
|Income from licensing of IP||40,000|
|Less tax deductible expenses:|
|Amortisation (i.e. €120,000 over 5 years)||(24,000)|
|Finance cost re the expenditure for development of IP||(4,000)|
|Other direct expenses||(2,000)|
|80% exemption as per new legislation||(8,000)|
|Corporation tax @ 12.5%||250|
|Effective corporation tax rate||2.5%|
The new IP regime provides very attractive opportunities for structuring the exploitation of IP assets through Cyprus, through the establishment of Cyprus tax-resident IP companies as the owners of the IPs.
This will help Cyprus compete more effectively other jurisdictions such as Netherlands, Luxembourg, Belgium etc. that have already implemented similar tax favorable regimes over IPs.
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
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