AMENDMENTS TO CYPRUS INTELLECTUAL PROPERTY BOX REGIME
Cyprus is an attractive low tax jurisdiction which offers a wide range of tax and other benefits to international businesses. One of these benefits, is the favorable taxation of Cyprus in relation to the Intellectual Property (IP) legislation. In October 2016 the Cyprus Parliament voted a new legislation, which amends the Intellectual Property (IP) regime as per the provisions of the Organization for Economic Co- Operation and Development’s Base Erotion and Profit Shifting Action 5, and the European Union rules.
The changes include amendments to the income tax legislation, as well as regulations for the implementation of the new provisions of the Law. The amendments will apply retrospectively as from 1 July 2016.
It is important that the legislation provides a transitional period in which under some conditions, those that were benefiting from the old IP regime may continue to benefit from it, until the of June 2021.
CURRENT IP BOX REGIME AND TRANSITIONAL ARRANGEMENTS
The existing IP Box regime which was introduced in Cyprus in 2012, relates to intangible assets which are defined in the Patents Law, the Trade Marks Law and the Intellectual Property Rights Law. A Cyprus company can apply for the benefits of the Law if is the owner of a qualifying IP, If the IP is included in the definition of the mentioned legislation and, If the qualifying assets generate taxable income for the company.
In such case, the 80% of the gross income of the intangible assets is excluded, following the direct cost deduction including amortization (more than 5 years) and interest costs. The remaining 20% is then subject to the normal corporate rate of 12,5%, thus reducing the effective tax rate to 2,5%.
The amendments to the Legislation provide transitional provisions for entities who have entered the existing IP Box regime, which enables them to continue benefit from the existing IP Box regime until 30 June 2021 with respect to intangible assets with the following criteria:
- Were acquired before 2 January 2016; or
- Were acquired directly or indirectly from a related person during the period form 2 January 2016 until 30 June 2016 and which assets at the time of their acquisition were benefiting under the IP Box regime or under a similar scheme for intangible assets in another state;
- Were acquired from an unrelated person or developed during the period from 2nd January 2016 until 30th June 2016
For the qualifying IP that had been acquired directly or indirectly from a related person during the period from 2nd of January 2016 until 30th of June 2016, and which do not fall under the above provisions, there are also transitional provisions until 31st of December 2016.
PROVISIONS FOR THE NEW IP BOX REGIME
The Law contains the rules and conditions which are applicable for assets which are developed after 1st of July 2016.
QUALIFYING INTAGIBLE ASSETS
Qualifying intangible asset or IP means an asset which was acquired, developed or exploited by a person in the course of his business (excluding intellectual property associated with marketing) and which is the result of research and development activities and includes intangible assets for which only economic ownership exists.
Qualifying intangible assets are restricted to:
- Patents as defied in the Patents Law
- Computer Software
- Other IP assets which are legally protected and are utility models or are nonobvious, useful and novel, where the person which utilizes them in furtherance of a business does not generate annual gross revenues exceeding Euro 7.500.000 (in case of a group of companies not exceeding Euro 50.000.000)
It is important that the business names (including brands), trademarks, image rights and other intellectual property rights used to market products and services which used to benefit from the existing regime will not be considered as Qualifying intangible assets in the new Regime.
Qualifying profits means the proportion of the overall income corresponding to the fraction of the qualifying expenditure, plus the uplift expenditure, over the total expenditure incurred for the qualifying intangible assets.
QE + UE x QA Where: QE: Qualifying Expenditure
OE UE: Uplift expenditure
OE: Overall Expenditure
QA: Overall Income
Overall Income arising from the Qualifying IP means the gross income accrued within the tax year, less the direct costs for generating such income.
The term includes but is not restricted to the below:
- Royalties or other amounts earned from the use of Qualifying IP
- License revenue for qualifying IP operations
- Any amount received from insurance or compensation in relation to the Qualifying IP
- Capital gains or any other income connected directly with the sale of the Qualifying IP
- Embedded income of the Qualifying intangible asset, which is the proceed from the sale of products or by services and procedures that are directly related to the Qualifying asset
Direct cost refers to all direct and indirect costs arose in earning the income from the Qualifying IP, the amortization of the cost of the intangible asset, and also the Notional Interest Deduction on equity contributed to finance the development of the qualifying intangible asset.
80% of the overall income arose from the Qualifying IP is treated as deductible expenses. In the case of resulting loss, only 20% of the loss can be surrendered to other group companies or be carried forward to subsequent years.
Qualifying Expenditure is the sum of total expenses for research and development incurred in any tax year, carried out wholly and exclusively for the development, improvement or creation of the Qualifying IP. The expenditure should be direct to the Qualifying IP.
Kind of Qualifying Expenditure or expenses are the following:
- Salaries and wages for the development, the creation and the research relates to the Qualifying IP
- Direct costs
- Any cost regarding to the facilities used for research and development, as well the expenses for suppliers for the research and development
- Cost relating to research and development which has been outscored to unrelated person
However the below examples cannot be deemed as Qualifying Expenditure:
- Cost of the acquisition of intangible assets
- Interest paid or payable
- Costs relating to acquisition or construction of immovable property
- Amounts paid or payable directly or indirectly to a related party or conduct research and development irrespective of whether these amounts relate to a cost sharing agreement.
- Costs which cannot be proved directly connected to a Qualifying IP
Up-lift expenditure will be added to the above costs, which mean the lower of:
- 30% of the eligible costs, or
- the sum of the amount needed for the acquisition and outscoring to related parties for research and development in relation to the eligible intangible asset.
Overall Expenditure is the total capital expenditure and includes the qualifying and not qualifying expenditure in respect to the creation of the Qualifying IP
A Cyprus Company has developed a computer program in August 2016. The program will be launched to the marked early 2017.
The cost incurred by the company for this computer program was as below:
- Salaries of the persons developed the computer program 80
- Research outscored to an unrelated company 20
- Research expenses outscored to a subsidiary company 35
- Rent 10
- Gross Income 300
- Promotion Expenses 60
In the OVERALL EXPEDITURE falls the Salaries of the persons developed the computer program, the Rent, the Research outscored to an unrelated company and the Research expenses outscored to a subsidiary company, and it is equal to 145.
In the QUALIFING EXPEDITURE falls Salaries of the persons developed the computer program, the Rent, the Research outscored to an unrelated company, and it is equal to 110.
Maximum up Lift Expenditure is the 30% of QUALIFING EXPEDITURE (110 x 30%= 33) or the total amount for the cost of acquisition and the research and development outscored to related parties (35). Therefore the uplift allowed is 33.
OVERALL INCOME is Gross Income less the Promotion Expenses (300-60= 240)
Qualifying Profit is QE +UE X QA = 110+33 X240 = 236.68
Therefore out of the 240 of overall income, the amount of 236.68 will be taxed under the IP Box Regime and the amount of 63.32 will be taxed under normal tax.
Each entity or individual wishes to benefit under the new Regime have the obligation to maintain proper books of account and records and comply with the relevant Laws of Cyprus
ASSETS EXCLUDING FROM THE NEW IP BOX REGIME
The non – qualifying assets i.e. the trademarks are not included to the list of Qualifying IP under the new legislation and therefore it will not be possible to enjoy the tax benefits.
The new legislation will become effective retroactively as from 1st July 2016.
While the range of assets and categories of expenditure that qualify for relief after 1st of July 2016 are more restricted than under the previous rules, the new regime still represents an attractive option for taxpayers.
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