News

In Brief

• Cyprus introduced on July 1st 2017 a simple, yet favorable, tax incentive scheme in an attempt to promote R&D in firms, and encourage innovation and economic growth;
• The IP regime follows “Nexus Approach”, compatible with the recommended guidelines by OECD;
• Notional tax-deductible expense equal to 80% of net qualifying IP profit;
• Net profit is calculated after deducting from the IP income (e.g Royalty income) all direct expenses associated with the production of the income, as well as capital allowances at a rate of 20%;
• Cyprus IP companies can achieve an effective tax rate as low as 2,5% on qualifying profits;
• Actual effective tax rate could be even lower e.g NID is also available on qualifying equity;
• For each tax year, the taxpayer may elect to waive this allowance, either in part or in whole;
• Provision to extend the annual tax amortization on IPs over the useful economic life of the IP (capped at 20 years);
• Cyprus registered IPs offer protection in all EU member states.

New Cyprus IP Box is applicable only on qualifying IPs that

(a) were developed by the Cyprus company in Cyprus,

(b) their development was outsourced to an unrelated party, and

(c) have been developed by the Cyprus company via a taxable foreign branch

The Nexus Approach

Qualifying profits are determined using this formula QP = (QE + UE)/ OE * QA

Illustration

• A Cyprus company owns internally developed (developed after the 1st of July 2017) patents that qualify as Qualifying IP under the New Cyprus IP regime;
• The costs for the R&D undertaken by the Cyprus company were € 500k (‘QE’);
• The company licenses its patent to third parties and receives royalty income which was amounted to € 2m (net) (‘QA’);
• No other expenses were incurred in relation to the above and the company have not acquired any Intangible Assets from other parties.

Using the Nexus Approach Qualifying profits are calculated as follows:

QP = (500k+0)/500k * 2m

QP = 2m

Tax computation for the year

- Without the provisions of the IP Regime:

- With the provisions of IP regime: