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:
1. Tax deductibility and scope
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, among others.
2. Expenditure of capital nature
Such expenditure incurred for the acquisition or development of intangible assets may be capitalised and depreciated on a straight line basis over five years commencing in the year of acquisition (i.e. 20% exemption p.a.).
3. Exemption of profits from the exploitation of the intangible asset
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.
4. Exemption of profits from the disposal of the intangible asset
80% of such profits is treated as an expense and thus disregarded for tax purposes. 2 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).
5. Effective tax rate
The effective tax rate on the profit from exploitation or disposal of the intangible asset is at a maximum of 2.5% and without taking into account expenses incurred (see 1 to 3 above) 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. assets depreciation, interest costs of financing the acquisition or development of the assets and any other direct expenses).
Implications on international IP structures
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.
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. We urge to remind that this favorable legislation is going to end on 2016 (with benefits extending to 2021): it’s time to take action if you have any plans.
We thank our partner KDA – Kanaris Demetriades & Associates for the informative article. LLCbox.com and their local partner are able to help you taking the right direction in company structuring. For any information more, please contact us at firstname.lastname@example.org.
*Although this publication is prepared with the utmost care we do not accept any liability for the content thereof. This publication is meant for information purposes only, it is not intended to give a definitive statement of the law and cannot be regarded as a binding legal, financial, tax or any other advice. Receivers of this publication should take no action before liaising with their financial advisors.