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Cyprus IP Box

The IP Box (Intellectual Property Box) is a special tax regime implemented in many European countries to attract innovation and scientific developments by reducing tax rates for companies that derive income from the use of intellectual property (IP) such as patents, copyrights, software, etc. The Cyprus IP Box is one of the most popular tax regimes for working with intellectual property.

The regime was introduced in 2012 through an amendment to the Income Tax Law. Since then, Cyprus has actively attracted companies from the IT, pharmaceutical, film, and other industries dealing with intellectual property rights.

 

What Are the Advantages of the Cyprus IP Box?

The popularity of the IP Box in Cyprus is due to several advantages.

Here are some of them:

  1. Reduced Corporate Tax Rate to 2.5%: This is the main advantage of the Cyprus IP Box. The benefit is realized by excluding 80% (4/5) of the profit from the tax base. Thus, only 20% (1/5) of the profit from intellectual property is subject to taxation, and instead of the standard 12% rate, the company pays only 2.5% (1/5).
  2. 0% Tax on the Disposal of Capital Assets: If the disposal of intangible assets is considered a capital transaction, the resulting capital gain is not subject to tax. These changes took effect on January 1, 2020, and the requirement to prepare a balance sheet report when transferring or disposing of an intangible asset has been abolished.
  3. Possibility of Applying an Amortization Period of Up to 20 Years: Capital expenditures related to the acquisition or development of intellectual property can be deducted in the first tax year in which the expenses were incurred, as well as in subsequent years. Development and acquisition costs are amortized over a period of up to 20 years. In practice, this can reduce the effective tax rate to below 2%.
  4. Wide Range of Intellectual Property Assets: The regime allows for the use of various IP assets, from computer programs to know-how.
  5. Flexibility in Application: This tax regime is suitable for different types of companies and different kinds of activities related to intellectual property. The main requirement for companies is that the company must be a tax resident of Cyprus.
  6. Compliance with International Standards: The IP Box regime in Cyprus is approved by the OECD and complies with the recommendations on combating base erosion and profit shifting (BEPS). It also complies with international intellectual property standards, including the Madrid Agreement, the Berne Convention for the Protection of Literary and Artistic Works, the Paris Convention for the Protection of Industrial Property, and others.
  7. Reliable Legal and Tax System: Cyprus has adopted the Anglo-Saxon legal model, which is known for its predictability and reliability. You can be sure that the laws will be enforced as written, and there will be no pressure from the authorities.
  8. Extensive Network of Double Taxation Avoidance Agreements: More than 65 countries have signed double taxation avoidance agreements with Cyprus. This allows businesses to expand and optimize taxes.

 

What Types of IP Are Suitable for Use in the Cyprus IP Box?

Before answering this question, it is worth exploring the concept of qualifying assets. These are rights to intellectual property that are the result of research and development by a Cypriot company. Such assets are created for conducting business activities or acquired by a Cypriot company for the purpose of generating business profits.

Income from qualifying assets can be deducted from the tax base by 80%.

Qualifying assets include:

  • Software with registered copyrights;
  • Performances;
  • Phonograms, videograms, and broadcasting organization programs;
  • Literary and artistic inventions;
  • Scientific discoveries;
  • Plant varieties and animal breeds, and rights to orphan drugs (used to treat rare diseases);
  • Inventions, utility models, industrial designs;
  • Other non-obvious, new useful intangible assets (e.g., trade secrets, know-how, rationalization proposals, etc.).

Thus, income from the sale of licenses, royalties, compensation from insurance of IP assets, and some other types of income from qualifying IP will be taxed at a reduced rate of 2.5% by excluding 80% of the income from the tax base.

However, the following are not considered qualifying assets:

  • Trademarks;
  • Trade names;
  • Rights to images;
  • Any marketing assets.

 

How Does Taxation Work for the Cyprus IP Box?

To calculate the tax burden using the IP Box in Cyprus, you need to apply a special formula:

QP (Qualified Profits) = OI (Overall Income) x (QE (Qualifying Expenditure) + UE (Uplift Expenditure) / OE (Overall Expenditure))

Let’s break down the formula in more detail:

  • OI (Overall Income): The overall income derived from qualifying intangible assets during the tax year. Any direct expenses incurred to earn the income are deducted from this amount. Such income may include royalties, license income, and any other income from qualifying intangible assets.
  • QE (Qualifying Expenditure): Qualifying expenses for qualifying intangible assets are defined as the sum of all expenses on research and development (R&D) incurred during the tax year solely for the development, improvement, or creation of new qualifying intangible assets. These expenses must be directly related to the qualifying assets. Such expenses may include:
    • Salaries;
    • Direct expenses;
    • Costs for setting up material and technical facilities for R&D;
    • Commission expenses for R&D;
    • Outsourcing expenses to unrelated parties for R&D.

The following are not considered qualifying expenses:

    • Costs for the acquisition of tangible assets;
    • Interest paid or payable;
    • Expenses for building or purchasing real estate;
    • Expenses that cannot be directly linked to qualifying assets;
    • R&D expenses through affiliated parties.
  • UE (Uplift Expenditure): This is the amount of expenses added to the qualifying expenses in the case of compliance with the lesser of the following amounts:
    • 30% of qualifying expenses;
    • Costs for acquiring qualifying assets plus the cost of outsourcing R&D activities to related parties regarding such assets.
  • OE (Overall Expenditure): Total expenses associated with qualifying intangible assets. These expenses include:
    • Qualified expenses;
    • The total cost of acquiring qualifying assets, plus the cost of outsourcing to related parties any R&D activities related to these assets incurred during any tax year.

 

Conclusion

The Cyprus IP Box is the most advantageous European tax regime for activities related to intangible assets, allowing the reduction of the tax rate to only 2.5%. At the same time, applying this tax regime requires a professional approach and reliable legal protection.

If you are considering registering a company in Cyprus with the subsequent application of the IP Box regime, please submit an application on our website or contact us in any way convenient for you.