The Cyprus IP Box Regime: Tax Treatment, Qualifying Assets and Nexus Approach
by George Savva, Tax Advisor
Cyprus has established itself as a premier destination for Intellectual Property (IP) holding and development. By combining a robust legal framework with one of the most competitive tax incentives in the EU, the Cyprus IP Box regime offers technology companies a strategic base for global growth.
Background
The Cyprus IP regime is fully compliant with international developments in the tax treatment of IP income and OECD guidance. The regime has been reviewed by the EU Code of Conduct and has been assessed as fully compatible with EU standards.
Benefits of the Cyprus IP Regime
80% of the profits qualifying for the regime are exempt from tax. With a corporate tax rate of 15%, this can result in an effective tax rate of as low as 3%.
Relevant Details of the Regime
Under the Cyprus IP regime, 80% of the qualifying profits generated from qualifying assets is deemed to be a tax-deductible expense for qualifying taxpayers.
In calculating qualifying profits, the regime adopts the “Nexus” approach. According to this approach, the level of qualifying profits is positively correlated to the extent that the claimant performs R&D activities to develop the qualifying asset (QA) within the same company.
Qualifying Assets
Qualifying assets under the regime include:
- Patents
- Copyrighted software programs
- Other intangible assets that are non-obvious, useful and novel
Qualifying assets do not include trademarks and copyrights.
Qualifying Persons
Qualifying persons include:
- Cyprus tax resident taxpayers
- Tax resident Permanent Establishments (PEs) of non-tax resident persons
- Foreign PEs that are subject to tax in Cyprus
Qualifying Profits
Qualifying profits are calculated in accordance with the nexus fraction below.
The Nexus Fraction
The nexus fraction is used to determine the amount of qualifying profits that will give the relevant deduction to the taxpayer.
Qualifying profits (QP) are calculated in accordance with the following nexus fraction:
Where:
- OI = “Overall income derived from the QA”
- QE = “Qualifying expenditure on the QA”
- UE = “Uplift expenditure on the QA”
- OE = “Overall expenditure on the QA”
Overall Income (OI)
Overall income (OI) is calculated as the gross income less any direct expenditure (including capital allowances) of the asset, i.e. the gross profit.
Overall income includes, but is not limited to:
- Royalties received for the use of the intangible asset
- Trading income from the disposal of qualifying asset
- Embedded income earned from the qualifying asset
Capital gains arising from the disposal of a QA are not included in overall income and are fully exempt from tax.
Qualifying Expenditure (QE)
Qualifying expenditure includes:
- Salary and wages
- Direct costs
- General expenses associated with R&D activities
- R&D expenditure outsourced to unrelated parties
QE does not include:
- Acquisition costs of the IP
- Interest paid or payable
- Amounts payable to related persons carrying out R&D
- Costs which cannot be proved to be directly associated with a specific QA
Uplift Expenditure (UE)
The uplift expenditure (UE) is the lower of:
- 30% of the QE; and
- The total acquisition cost of the QA and any R&D costs outsourced to related parties
Overall Expenditure (OE)
The overall expenditure (OE) is the sum of:
- The qualifying expenditure; and
- The total acquisition costs of the QA and any R&D costs outsourced to related parties incurred in any tax year
Cumulative Nexus Fraction
The nexus approach is an additive approach. The calculation requires both:
- QE to include all qualifying expenditures incurred by the taxpayer over the life of the IP asset; and
- OE to include all overall expenditures incurred over the life of the IP asset
Losses from Qualifying Assets
Where the calculation of qualifying profits results in a loss, only 20% of this loss may be carried forward or group relieved.
