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Cyprus – New Intellectual Property (IP) regime as from 1 July 2016
The current IP tax regime of Cyprus has been recently amended in order to comply with the OECD and EU guidelines. The law takes effect as from 1 July 2016.
The current regime continues until 30 June 2021 for all structures that existed as at 31 December 2015. It also applies to structures set up from 2 January 2016 to 30 June 2016 if the transactions that resulted in the set up are between unrelated parties. Structures set up during this same period but with transactions between related parties are still allowed, subject to a business purpose test.
The new regime which applies from 1 July 2016 is available to a smaller number of IP assets as follows:
- Patents as defined under the Law for Patents;
- Computer software programs;
- Other legally protected assets which are within the following categories:
a) utility models, IP assets that grant protection to plants and generic material, orphan drugs designations and extensions granted to patents
b) assets which are non obvious, useful and novel. Must be used to earn income which does not exceed €7.500.000 per year (group income does not exceed €50.000.000).
Income qualifies for the new regime only to the extent that the taxpayer itself incurred the research and development (R&D) expenditure that resulted in the creation of the IP. A formula is used to determine the percentage of IP income that can qualify for the new regime benefits. In principle the highest the R&D expenditure self incurred, the highest the income that would qualify and vice versa. Thus acquired IP does not qualify.
Once the qualifying profit is determined using the formula, then 80% of this is deemed as deductible expense. The taxpayer can elect each year the amount of allowance to be claimed. To arrive at the profit, deductible are all expenses incurred for the earning of the income, amortisation of the cost of the IP and notional interest on new equity used to finance the IP development. If loss occurs only 20% can be carried forward and/or group relieved. The taxpayer can elect each year the amount of amortisation to be claimed.
It is noted that trademarks, trade names, image building and other similar assets do not qualify under the new regime.
Jurisdictions with IP regimes are all expected to be applying the same principles. During the transitional period Cyprus retains its attractiveness. IPs which will not be entitled to the benefits from 1 July 2021 will still enjoy the low corporate tax rate of Cyprus, its network of double tax treaties and the relevant EU directives.