Cyprus has joined countries like Belgium, Hungary, Luxembourg, Netherlands, France, and the United Kingdom in applying an IP Box tax regime. But, it offers one of the lowest effective tax rates among all of them.
In this article, we will delve into the details of what the IP Box tax regime in Cyprus is, how it works, who can benefit from it, and the numerous advantages that come with it.
What is the IP Box tax regime in Cyprus?
The Cypriot Income Tax Law (‘ITL’) provides for an Intellectual Property (‘IP’) box regime which is effective as of 1 July 2016.
Cyprus introduced the IP Box regime as a favorable tax framework that offers significant incentives for businesses that generate income from intellectual property.
As of now, qualifying assets include patents, computer software, utility models, and other IP assets such as non-obvious, useful, or novel. The qualifying revenue from these assets include royalties, licensing fees, compensation income, trading profits from the disposal of IP, capital nature gains from the disposal not subject to any tax.
Under this regime, 80% of the profits qualifying for the regime are exempt from tax and only 20% of the qualifying profits derived from intellectual property are subject to corporate tax.
With a corporate tax rate of 12.5%, this can result in an effective tax rate of as low as 2.5%.
Who can use the IP Box regime?
- Technology startups
- Pharmaceutical companies investing in research and development of new drugs
- Creative agencies, such as advertising agencies and design studios.They can reduce their tax burden when licensing the rights to their creative work, which includes advertising campaigns, branding assets, or digital content.
- Manufacturers with patents
- Service providers if they develop proprietary methodologies or frameworks, the income from licensing these intellectual properties is eligible for the tax advantages provided by the IP Box.
In essence, the IP Box tax regime in Cyprus is not limited to specific industries but extends its benefits to a broad spectrum of businesses.
What are the key criterias that must be met?
- Ownership or Exclusive rights: To participate in the IP Box program, a business must either own or hold exclusive rights to the intellectual property generating income. This means that the business should have the legal authority to license, use, or sell the intellectual property. Ownership can be established through patents, copyrights, trademarks, or other related rights.
- Qualifying IP: The intellectual property must be registered and fall within the categories of qualifying IP. These typically encompass patents, trademarks, copyrights, and closely related rights.
- Nexus to Cyprus: For a company to leverage the IP Box tax regime, the intellectual property must have a substantial connection to Cyprus. This connection can be established through various means, such as the development of the IP within Cyprus, its registration in the country, or its primary utilization within Cyprus. This requirement ensures that the benefits are reserved for businesses that are genuinely contributing to the Cypriot economy.
- Substance requirements: A fundamental component of the IP Box eligibility criteria is that companies must maintain substantial activities related to intellectual property in Cyprus. This ensures that the benefits are directed at businesses with actual economic ties to the country. Substance requirements may involve having research and development activities, administrative functions, or other relevant operations in Cyprus that are directly linked to the intellectual property being taxed under the IP Box.
Book a free call for a short consultation about IP box and confirm with YouReg Manager that the activity you have planned matches for it!
