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What is a Cyprus IP Company?

Cyprus can be an ideal jurisdiction to set up and or relocate an IP Company. If your Company is an owner of an IP asset, then Cyprus could be the place to be. A Cyprus IP Box Company offers several advantages that include very favorable tax advantages that are in line with the OECD and EU guidelines, a legal framework that can offer asset protection and an operating environment that your team can enjoy working and have access to a large pool of highly educated talents.

Tax Advantages

All “Qualifying intangible asset” can enjoy a tax deduction that can lead up to 80% of the taxable profits derived from this asset and effectively a Corporation Tax that can be as low as 2.5%. A qualified asset is an asset which was acquired, developed, or exploited by a person in furtherance of his business, (excluding intellectual property associated with marketing) and which is the result of research and development activities and includes intangible assets for which only economic ownership exist. For example, patents as defined in the Patents Law, computer software and other IP assets that are non obvious, useful, and novel.

In addition, the Company can benefit from the use of a large number of Double Tax Treaties that Cyprus has signed as well as the Relief under the EU Interest and Royalty Directive that allow the Company to be excluded from the payment of withholding tax at a foreign jurisdiction on incoming Royalties.

Other tax benefits include 0% tax on dividends payable to foreign shareholders and Cyprus non domicile tax residents and 0% capital gains tax on the Sale of the Company.

Another very important fiscal benefit to the Company is that can attract talent from all over the world that they can benefit from a very advantageous tax regime. Individuals who are not considered to be “domiciled” in Cyprus would be exempt from payment of taxes on worldwide income from:

  • Dividends
  • Interest
  • Sale of securities

In addition, can benefit from:

  • 50% deduction on personal income tax, if their annual Salary is over EUR100K
  • 20% deduction on personal income tax, if their annual Salary is below EUR100K
  • 0% inheritance tax
  • 0% Lifetime gift tax

Legal framework

Cyprus legal framework is based on Common Law and is in line with the European legislation. In reference to the intellectual properties Cyprus meets the requirements of The World Intellectual Property Organization (WIPO) and the European Union Intellectual Property Office (EUIPO).

Operating environment

Cyprus is a beautiful place to call home. A place that you can have safety, great education for your children and family, and an ideal climate with sunshine all the year round. Quite importantly is that there are no language barriers as English is widely spoken. Cyprus is in the top countries % wise of university graduates, who choose to come home irrespective of their talent, making it so much easier to recruit the best suitable for your Company.

The government showed clearly that will maintain its low taxation system and further expand the avoidance of double taxation treaties with more countries. It has been openly and repeatedly expressed by the Minister of Economy and the President that they place a lot of emphasis in enhancing the IP industry in Cyprus through attracting foreign investment.

Tax regime in more detail

Qualifying intangible assets

“Qualifying intangible asset” means an asset which was acquired, developed or exploited by a person in furtherance of his business, (excluding intellectual property associated with marketing) and which is the result of 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 nonobvious, useful, and novel, where the person which utilizes them in furtherance of a business does not generate annual gross revenues exceeding Euro 7.500.000 (in case of a group of companies not exceeding Euro 000.000)

Business names (including brands), trademarks, rights to public presence, image rights and other intellectual property rights used to market products and services are not considered as qualifying intangible assets.

Qualified intangible assets need to be certified as such by a Specialized Firm abroad.

Qualifying profits

“Qualifying profits” means the proportion of the overall income corresponding to the fraction of the qualifying expenditure plus the uplift expenditure over the total expenditure incurred for the qualifying intangible asset. Qualifying profits in simple terms is the fraction of the profits that will be taxed at 2.5%

The qualifying profits are calculated based on the following fraction:

QE + UE X OI
OE

Where:

OI is the “overall income derived from the QA”

QE is the “qualifying expenditure on the QA”

UE is the “uplift expenditure on the QA” and

OE is the “overall expenditure on the QA”

Overall income (OI)

“Overall income” arising from the qualifying intangible asset means the gross income accrued within the tax year, less the direct costs for generating such income.

The overall income includes, but is not limited to the following:

  • royalties or other amounts in connection with the use of qualifying intangible asset
  • any amount for a license for the operation of qualifying intangible asset
  • any amount received from insurance or as compensation in relation to the qualifying intangible asset
  • capital gains and other income from the sale of qualifying intangible asset
  • embedded income of qualifying intangible asset arising from the sale of products or by using procedures that are directly related to this item

In the case of a resulting loss, only 20% of the loss can be surrendered to other group companies or be carried forward to subsequent years.

Qualifying expenditure (QE)

“Qualifying expenditure” for qualifying intangible asset is the sum of total research and development costs incurred in any tax year, wholly and exclusively for the development, improvement or creation of qualifying intangible assets and which costs are directly related to the qualifying intangible assets.

Qualifying expenses include, but are not limited to, the following:

  • wages and salaries
  • direct costs
  • general expenses relating to installations used for research and development;
  • expenses for supplies related to research and development activities
  • costs associated with research and development that has been outsourced to non -related persons

but do not include:

  • cost for the acquisition of intangible assets
  • interest paid or payable
  • costs relating to the acquisition or construction of immovable property
  • amounts paid or payable directly or indirectly to a related person to conduct research and development activities, regardless of whether these amounts relate to cost sharing agreement
  • costs which cannot be proved directly connected to a specific eligible intangible asset

Expenditure for the assignment of R&D activities to unrelated persons, as well as the expenditure of general and theoretical nature for R&D, that cannot be allocated to the qualifying expenditure of a specific qualified asset with which they have a direct connection, may be allocated proportionately to the qualified assets or products.

Qualifying expenditure is included in the nexus fraction in the year in which the expenditure was incurred, regardless of its accounting or tax treatment.

Uplift expenditure (UE)

An up-lift expenditure will be added to the above costs, which means the lower of:

  • 30% of the eligible costs, or
  • the total amount of the cost of acquisition and outsourcing to related parties for research and development in relation to the eligible intangible asset

Overall expenditure (OE)

Overall expenditure of a qualifying asset is the sum of (i) qualifying expenditure, and (ii) the total acquisition cost of the qualifying asset and any R&D costs outsourced to related parties incurred in any tax year.

The following applies for purposes of calculating the fraction:

  • Direct costs include all expenditure incurred directly or indirectly, wholly and exclusively, for the production of the overall income;
  • The deduction granted under a corresponding transfer pricing adjustment as per the ITL that arises from the development or sale of a qualifying asset is treated as a direct
  • The deduction granted under the notional interest deduction provision in the ITL, which is attributable to a qualifying asset, is considered an indirect expense for calculating the

The taxpayer may choose to forego all or part of the deduction and, where the calculation of qualifying profits results in a loss, only 20% of the loss may be carried forward or group relieved under the ITL.

Capital Allowances

The capital costs of such intangible assets will be tax deductible and will be spread over the useful economic life of the asset, as determined by generally acceptable accounting principles (up to a maximum useful life of 20 years). Upon the disposal of such an intangible asset, a balancing statement will need to be prepared with any balancing addition being subject to income tax and any balancing deduction being tax deductible. The taxpayer has the option not to claim capital allowances for such intangible assets in a particular tax year.

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