The taxation of company dealing with Intellectual Property in Cyprus
What is considered as an IP company in Cyprus and general?
The IP tax regime covers a wide range of intangibles including:
• Copyrights, which may take any of the following forms: literary works, dramatic works, musical works, scientific works, artistic works, sound recordings, films, broadcasts, published editions, databases, publications, software programmes
• Patented inventions
• Trademarks (and service marks), designs and models that are used or applied on products the above is a non-exhaustive list. Registrable IPs need not be registered in Cyprus to benefit from IP regime.
What are the benefits of an IP company in Cyprus?
The new provisions provide exemptions from tax of income related to IP. More specifically:
• 80% of worldwide royalty income generated from IP owned by Cypriot resident companies (net of any direct expenses*) is exempt from income tax
• 80% of profit generated from the disposal of IP owned by Cypriot resident companies (net of any direct expenses*) is exempt from income tax
• Any expenditure of a capital nature for the acquisition or development of IP is claimed as a tax deduction in the year in which it was incurred and the immediate four following years on a straight-line
• All the above exemptions are also available for IPs acquired or developed before January 2012 Cyprus’ wide double tax treaty network and access to the EU Interest and Royalty Directive serve as additional means for the group to achieve tax optimisation when it comes to IP exploitation through Cyprus.
- Established international financial center with a stable tax regime
- EU Member State with access to EU Directives - On the white list of OECD - Tax system approved and compliant by EU and OECD - Excellent double tax treaties with certain non-EU countries (e.g. Russia, Ukraine, India, South Africa)
- Elimination or significant reduction of foreign withholding tax on receipt of royalties from other countries. This is achieved through access to benefits of double tax treaties or EU Directives
- High standard of professional services
- Availability of nominee/trustee shareholders for confidentiality purposes where needed - No exchange controls restricting the movement of capital
- Very competitive and attractive tax regime
Other helpful information’s about Cy IP TAX REGIME
- As from 1 January 2012 profits from the use or sale of IP will be reduced by 80% (i.e. be tax exempt) before being taxed at the flat corporate income tax rate of 12,5% which is the lowest in Europe. This brings the effective tax rate on IP income to less than 2,5%.
- The scope/definition of IP has been broadened and now includes all intangible assets (brands, franchises, copyrights, designs, computer software, patents etc.)
- For an IP owning company: As from 1 January 2012 the acquisition or development cost of an IP will be amortized by 20% per annum (i.e. 5 year straight line depreciation for tax purposes)
- For an IP company involved in back-to-back licensing arrangements: Where an IP is licensed to the Cyprus company and in turn the Cyprus company sublicenses it, thin (small) spreads are accepted
- The expenses of a Cyprus company are tax deductible to the extent that they are incurred wholly and exclusively for the production of the company’s own income
- Availability of foreign tax credit (deduction) for foreign tax suffered (e.g. foreign withholding tax) against Cyprus tax resulting from the same income
- No Cyprus withholding tax on payments of royalties abroad unless the royalty is used in Cyprus
- No Cyprus withholding tax on dividend distributions or liquidation payments to non-Cyprus residents - Disposing the shares of a Cyprus company attracts no taxation in Cyprus (provided it holds no immovable property in Cyprus)
- Profit of foreign branch (e.g. acting as the IP owner) is tax exempt in Cyprus under conditions
- No exit taxes
A Cyprus tax resident company disposes an IP right for EUR 1,000,000. The cost of the acquisition was EUR 500,000 and amortisation was claimed for two years. Under the new IP Regime the proceeds from the disposal will be taxed as follows:
Sales proceeds €1,000,000
Less: Cost of acquisition (€500,000)
€500,000
Add back: Amortisation claimed €200,000
€700,000
80% Statutory exemption 70,000* 80% (€560,000)
Taxable income €140,000
Tax Liability 140,000 @ 12, 5% €17,500
Effective tax rate 1,75%