Tax Alert – Changes to the Cyprus IP regime

Tax Alert – Changes to the Cyprus IP regime

A new draft legislation has been presented to the House of Representatives to include the amendments to the income tax legislation in relation to the Cyprus IP box regime, as well as specific regulations as to how the implement the new provisions of the law. The main attributes of the new legislation are presented below.

Transitional period to 30 June 2016

Transitional provisions are included in the draft legislation in relation to persons who have already entered the Cyprus IP box regime, which allows them to continue claiming the benefits of the legislation up to 30 June 2021 for qualified intellectual property rights which:

  • Were acquired before 2 January 2016;
  • Were acquired directly or indirectly from a related person during the period 2 January 2016 to 30 June 2016 but at the time of acquisition these intellectual property rights were enjoying the benefits of the Cyprus or other IP box regime;
  • Were acquired from an unrelated person or have been internally developed during the period from 2 January 2016 to 30 June 2016.

There are transitional provisions to continue to apply the IP box provisions for acquisitions from related parties made during the period 2 January 2016 to 30 June 2016 up to 31 December 2016, however further clarifications will be required as to the conditions.

Provisions of the new IP box regime

The new law will be applicable for intellectual property assets developed after 1 July 2016. More specifically, qualified intangible assets are those intellectual property assets developed by a person as a result of research and development activities including assets even when there is no legal registered ownership but only economic ownership. These assets are the following:

  • Patents
  • Computer software
  • Other IP assets (non obvious, useful and unique) utilized in the business of a person for the generation of taxable income which does not exceed annual gross revenues of Eur 7.500.000.

It is specified that trademarks, image rights, brands, business names and other relevant intellectual property rights used to market products and services. There is a further requirement in the draft legislation for such intangible assets to be certified by a specialized firm abroad in order to be considered as qualified for the application of the new IP legislation.

As in the previous IP box regime, 80% of the overall profit arising from qualified intangible assets (ie gross income accrued in the tax year less direct costs for generating such income less amortization cost less notional interest on new share capital/share premium used to finance the development of the intangible asset) may be claimed as a deemed deductible expense.  

Regarding the gross income the provisions of the new IP legislation include both the license income as well as the capital gains from the sale of such qualified intangible assets. Moreover, it is important to note that embedded arising from the sale of products or procedures directly related to such intellectual property rights are also considered as qualified income.

Regarding qualified direct costs, the new legislation includes amongst others r&d costs, wages and salaries, other direct and general expenses but does not include interest expenses and costs attributed directly/indirectly to a related person to conduct r&d activities. A further advantage is that an up-lift expenditure can be added to the above being the lower of (i) 30% of the eligible costs or (ii) total cost of acquisition and outsourcing to related parties for r&d in relation to these qualified intangible assets.

It is expected that the new draft legislation outlined above will be voted after the summer holidays to be retrospectively come into force as from 1 July 2016 onwards.