Philippos Aristotelous of Andreas Neocleous & Co looks at intellectual property rights tax incentives in Cyprus
In May 2012 Cyprus introduced a package of incentives and tax exemptions relating to investment in intellectual property rights, commonly known as an intellectual property rights box (“IP box”).
Intellectual property projects lend themselves to cross-border planning by reason of the mobility of intellectual property rights, which do not consist of physical assets and so can be easily moved between different jurisdictions and tax systems according to prevailing circumstances.
Comparison with other European IP box regimes
The table below summarises the key aspects:
|Effective tax rate||2.50%||6.80%||15%||9.50%||5.76%||5%||15%||10%|
|Qualifying IP assets||All IP assets, including patents, trademarks, copyright, formulas, designs, knowhow and processes.||Patents and supplementary patent certificates.||Patents, extensions, patentable inventions and industrial fabrication processes||Patents, know-how, trademarks, business names, know-how and copyrights||Patents, trademarks, designs, domain names, models and software copyrights||Self-developed IP relating to patents or approved R&D.||Patents, formulas, processes, plans, models, designs and know-how||UK and European patents, supplementary protection certificates and plant variety rights|
|Ineligible IP assets||None||Know-how, trademarks, designs, models, formulas or processes||Acquired IP rights held for less than two years||None||Know-how, formulas, copyrights (other than software)||Trademarks and brands Acquired IP||Trademarks, copyrights of literary, artistic, or scientific work, including software||Trademarks, copyrights and designs|
|Internally developed or acquired?||Applies to both internally developed and acquired IP||Internally developed IP and improvements to acquired IP||Applies to both internally developed and acquired IP||Applies to both internally developed and acquired IP||Applies to both internally developed and acquired IP, but not IP acquired from a related party||Self-developed only||Self-developed only||Self developed and “actively managed” (used in business) only|
|Limitations on where R&D takes place||None||Some||None||None||None||Some||Some||None|
|Qualifying revenue||All income, including compensation for breach of rights||Patent income||Royalties net of cost of managing qualifying IP||Royalties||Royalties net of costs (amortization, R&D costs, interest etc)||Net income from qualifying assets||Gross income from qualifying assets||Net income from qualifying IP|
|Deduction rate||80%||80%||None – reduced tax rate||50%||80%||None – reduced tax rate||50%||None – reduced tax rate|
|Overall limit of deduction||None||100% of pre-tax income||None||50% of pre-tax income||None||None||Six times the cost of developing the IP||None|
|Gains on disposal included||Yes||No||Yes||Yes||Yes||Yes||No||Yes|
While the French, Hungarian, Luxembourg, Netherlands and United Kingdom schemes offer partial exemption of gains on disposal, the exemptions are less attractive than those provided by the Cyprus scheme, due to limitations on qualifying assets and less generous deduction rates. Furthermore, full exemption can be relatively easily obtained in Cyprus by holding the IP assets in a separate company and disposing of the shares in the company rather than the IP itself, taking advantage of Cyprus’s extensive capital gains tax exemptions.
In most comparisons of the benefits offered by different jurisdictions there is a trade-off to be made. One jurisdiction will be better on certain aspects, but another will be better on others, and the differences will have to be assessed and weighed against one another to arrive at the best overall solution. In the case of the IP box regime there is no need for this, as Cyprus is the clear leader on every single aspect.
In most cases immediate economic and tax savings can be accomplished by transferring intellectual rights currently held by entities located in low or no tax jurisdictions to Cyprus resident companies in order to take advantage of the new exemptions. The transfer of IP rights into a Cyprus company will not attract any form of taxation in Cyprus and the new benefits and substantial exemptions will become available as soon as the asset is transferred.
The Cyprus IP box provides attractive opportunities for structuring the exploitation of IP assets through Cyprus and in particular through the use of Cyprus-resident IP owners, especially in conjunction with Cyprus's extensive network of double tax treaties, under which withholding tax on royalty income is either eliminated altogether or substantially reduced.
There has been considerable opposition from some countries to the introduction of “intellectual property box” regimes and as part of the G20/OECD base erosion and profit shifting project a number of countries, including Germany, put forward what has become known as a “modified nexus” approach. This approach seeks to ensure that preferential regimes for intellectual property require substantial economic activities to be undertaken in the jurisdiction concerned, by requiring tax benefits to be connected directly to R&D expenditures within the jurisdiction.
Now that broad agreement has been reached on the modified nexus approach there is only limited time to enter into the Cyprus scheme, since it and all similar schemes will be closed to new entrants from June 2016. However, companies that join the scheme before then can look forward to benefiting from substantial savings until mid-2021. All that is required is to establish a suitable Cyprus structure for holding IP and transferring the business’s intangible assets into it.
We therefore recommend any business with significant IP assets or income to examine the option of benefitting from the favourable Cyprus IP taxation regime.
Andreas Neocleous & Co