Have you ever wondered how some countries manage to attract leading tech companies and foster innovation? One of the secrets lies in their Intellectual Property (IP) Box regimes. These regimes offer significant tax incentives for companies involved in research and development. Today, we will explore the IP Box regime in Cyprus, an attractive destination for IP due to its favorable tax environment and robust legal protections.

What is the IP Box Regime?

The IP Box Regime, also known as a patent box, innovation box, or IP box, is a corporate tax regime used by many countries to incentivize research and development activities. It achieves this by taxing revenues derived from licenses, royalties, patents, and the sale or transfer of qualified IP assets at lower rates compared to other commercial revenues. In Cyprus, this regime is designed to attract innovative businesses and support technological advancements.

Principal Features of the Cyprus IP Box Regime

Cyprus offers one of the most competitive IP Box regimes in the world. Here are some of its principal features:

• 80% Exemption of Qualified Profit: Four-fifths (80%) of the profit earned from the use of intangible assets is deducted for tax purposes, resulting in an effective tax rate of just 2.5% when applying the standard corporate tax rate of 12.5%.
• 0% Tax on Capital Gains: If the disposal of intangible assets is considered a capital nature transaction, the resulting capital gain is not taxable. This change became effective on January 1, 2020.
• Amortization Period of Up to 20 Years: Capital expenditure related to IP acquisition or development can be amortized over a period of up to 20 years, further reducing the effective tax rate.

With a corporate tax rate of 12,5%, Cyprus stands out with its maximum tax rate of 2.5% on income earned from IP assets, which offers significant advantages compared to other countries, e.g. Belgium (4.44%), Hungary (4.5%), and Luxembourg (5.2%).

Qualifying Assets and Revenue

Under the Cyprus IP Box regime, qualifying intangible assets include patents, computer software, and other legally protected IP assets that are non-obvious, useful, and novel. The revenue streams that qualify for the regime include royalties, license income, and income from the disposal of qualifying intangible assets, among others.

The Nexus Fraction Approach

The Cyprus IP Box regime uses the Nexus fraction to determine the amount of qualifying profits that will give the relevant deduction to the taxpayer. The formula is as follows:

GP = OI x (QE + UE) / OE

Where:

• OI is the overall income derived from the qualifying asset.
• QE is the qualifying expenditure on the qualifying asset.
• UE is the uplift expenditure on the qualifying asset.
• OE is the overall expenditure on the qualifying asset.

Practical Steps to Benefit from the Cyprus IP Box Regime

To take advantage of the Cyprus IP Box regime, companies need to follow several steps:

• Set Up a Cyprus-Based Company: Registering a company under Cypriot law is straightforward and quicker than in many other EU countries.
• Transfer of Ownership: Transfer the IP ownership to the newly established company.
• Licensing of Rights: The Cyprus company can license the rights to use the IP to any other company.
• Patent Box Structure: Seek legal advice to organize the patent box structure and prepare necessary legal agreements.

In a Nutshell

The Cyprus IP Box regime provides an opportunity for companies to benefit from a highly favorable IP tax environment while enjoying robust legal protections.

If you are considering setting up an IP holding and development company, Cyprus is a notable contender. And if you're setting a company in Cyprus, Mantle is the modern accounting and ERP suite to power your business operations end-to-end. Sounds interesting? Sign up