Intellectual Property (IP) can be one of the most valuable assets of an organisation. If IP is critical to your business, choosing the right location for the centralisation and management of the IP is a key strategic business decision. The ideal location to establish an IP structure is one that can serve the organisation’s business strategies and model, safeguard and protect its IP, taking into consideration possible tax implications.
The amended IP box scheme and the revised legislation have been effective since July 2016. This memo provides a summary of how Cyprus can offer an efficient IP regime, coupled with the protection afforded by EU Member States and by the signatories of all major IP treaties and protocols.
In short, 80% of the qualifying profits may be considered as non-taxable. Below you may find information in relation to the IP regime, how this works and how it may be of assistance to your organisation.
Qualifying Intangible Assets
In order for an IP to benefit from the applicable IP regime it must be categorised as a Qualifying Intangible Asset. “Qualifying intangible assets” refer to an asset that was acquired, developed or exploited by a person in performance of his business (excluding intellectual property associated to marketing), which relates to research and development activities, and includes intangible assets for which only economic ownership exists. These assets are:
- patents as defined in the Patents Law;
- computer software;
- other IP assets that are non-obvious, novel and useful, where the person which utilizes them in further development of a business that doesn’t generate annual gross revenues exceeding Euro 7.500.000 (or Euro 50.000.000 for a group of companies)
Those not treated as qualifying intangible assets include: business names, brands, trademarks, rights to public presence, image rights and other intellectual property rights.
“Qualifying profits” relate to the share of overall income that corresponds to the part of the qualifying expenditure as well as the uplift expenditure across the total expenditure incurred for the qualifying intangible asset.
The below formula may be used for deriving to the Qualifying Profit amount:
Qualifying Profit = Overall Income X (Qualifying Expenditure + Uplift Expenditure) / Overall Expenditure
“Overall income” relates to the gross income accrued within the tax year, after deducting direct costs for income generation. Direct costs relate to all direct and indirect costs incurred in earning the income from the qualifying intangible asset, including the amortization of the cost of the intangible, as well as notional interest on equity contributed to finance the development of the qualifying intangible asset. The overall income includes of, but is not limited to:
- royalties or other amounts in relation to the use of qualifying intangible asset;
- any amount for licencing of the operation of a qualifying intangible asset;
- any amount received from insurance or as compensation in relation to the qualifying intangible asset;
- capital gains and other income arising from the sale of a qualifying intangible asset;
- embedded income of the qualifying intangible asset arising from the sale of products or services or through use of procedures that are directly related to this.
“Qualifying expenditure” for a qualifying intangible asset relates to the total research and development costs suffered in any tax year wholly and exclusively for the development, improvement or creation of qualifying intangible assets and where costs are directly related to the qualifying intangible assets. Qualifying expenditures include:
- wages and salaries;
- direct costs;
- general expenses relevant to installations used for Research and Development;
- commission expenses relating to Research and Development;
- outsourced costs to non-related persons for the purpose of Research and Development.
However Qualifying Expenditure does not include expenses for:
- acquiring intangible assets;
- interest payable or paid;
- costs related to construction or acquisition of immovable property;
- amounts paid directly or indirectly to related persons for the conduct of research and development activities, irrespective of whether costs were relating to a cost sharing agreement;
- costs that cannot be proved with a direct connection to the intangible asset.
Uplift expenditure is the lower of (i) 30% of the Qualifying expenditure and (ii) the total cost of acquiring the qualifying asset plus the cost of subcontracting to related parties of any research and development regarding the said qualifying asset.
Overall expenditure is the addition of (i) the qualifying expenditure and (ii) the total cost of acquiring the qualifying asset plus the cost of subcontracting to related parties of any research and development regarding the said qualifying asset suffered in any tax year.
Assume that a Cyprus IP company licenses its IP to other companies and in return receives an annual royalty income of EUR 800,000. The IP was acquired for EUR 200,000 and additional research and development cost was subcontracted to non-related party for EUR 100,000. It also has direct expenses of EUR 150,000. The expected annual tax for the Cyprus IP Company will be as follows:
|Direct deductible expenses||(150,000)|
|Uplift Expenditure – lower of EUR 30,000 and EUR 200,000||30,000|
|650,000 X (100,000+30,000) / 300,000||281,667 X 80% = 225,334|
|Therefore, the amount of EUR 225,334 will be considered as non-taxable.|