The House of Representatives has voted in favour of the amendments to the income tax laws in relation to the IP Box Regime (exploitation and/or sale of intangible assets). The aim was to bring the Cypriot legislation, in line with the provisions of the OECD BEPS Action 5 and within the new EU rules on the subject. The law will become effective within 30 days, unless amended. We will be able to provide further update once the details of the regulations are approved.
- Transitional arrangements for old IP Box regime
The old IP Box regime covers intangible assets as they are defined in the Trade Marks Law, the Patents Law and the Intellectual Property Rights Law. In essence, the old IP Box Regime was providing for the following:
- In the case of profit, a tax exemption of the 80% of the gross profit, i.e. after deducting all direct costs (including interest and amortization cost) from the total revenues.
- In the case of loses, only 20% of the resulting loss could be “transferred” to other group companies or be carried forward to subsequent years.
As expected, transitional provisions for assets qualifying under the old legislation, are included in the new law. Therefore, persons/ legal entities who have entered into the old IP Box regime, can benefit from the transitional provisions which enable them to continue claiming the existing benefits until 30 June 2021, provided that the intangible assets meet the following criteria:
- were acquired before 2 January, 2016; or
- were acquired directly or indirectly from a related party during the period from 2 January 2016 until 30 June 2016 and which assets at the time of their acquisition were benefiting under the IP Box regime or under a similar scheme for intangible assets in another state, or
- were acquired from an unrelated party or developed during the period from 2 January 2016 until 30 June 2016
In addition, there are also transitional provisions until 31 December 2016 for intangible assets which were acquired directly or indirectly from a related party during the period from 2 January 2016 until 30 June 2016 and which do not fall under the above provisions.
As a result of the transitional rules, the income from the intangible assets which qualifies will now include embedded income and intangible assets for which only economic ownership exists.
In order for intangible assets to qualify for the transitional rules, they should have either generated income or their development to have been completed, as at 30 June 2016.
- Provisions for the new IP Box regime
In general, the new IP Box regime provides for a deduction of 80% from the qualifying profits (in essence only 20% of the qualifying profits are taxed at the rate of 12.5%) earned from qualifying intangible assets.
“Qualifying intangible assets” are defined as patents (as defined in the Patents Law) and computer software that have been developed after 01 July 2016.
Marketing and related IPs, for example trademarks, are not considered as qualifying intangible assets under the new Cyprus IP Box regime.
The new IP Box regime provides guidance as to how the qualifying profits will be calculated. This will take into consideration the overall income arising from the qualifying assets, the qualifying expenditure, the uplift expenditure and the total expenditure. In essence the qualifying profit will be a percentage of the overall income. The percentage will be the qualifying expenditure and the uplift expenditure over the total expenditure incurred for the qualifying intangible assets.
“Overall income” is defined as gross income less direct costs (includes amortisation and notional interest) arising from qualifying intangible assets.
“Qualifying expenditure” is defined as the sum of total research and development costs incurred, wholly and exclusively for the development, improvement or creation of qualifying intangible assets.
“Uplift expenditure” is defined as 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
Our corporate team will be able to provide further updates once the details of the regulations are approved.