Introduced in 2012, the Cyprus intellectual property rights box regime offers a range of tax incentives and exemptions for the creation and exploitation of intellectual property. The scheme contrasts favourably against similar regimes in other European jurisdictions, providing significant advantages.

In May 2012, as part of a package of measures aimed at stimulating the island's predominantly service-oriented economy and promoting economic growth, the Cyprus government introduced an array of incentives and exemptions relating to investment in intellectual property rights, commonly known as an intellectual property rights box (''IP box'').

The concept of the IP box dates back to 2001, when France introduced a reduced rate of tax on revenue or gains deriving from the license, sublicense, sale, or transfer of qualifying IP. Since then, Belgium, Hungary, Ireland, Luxembourg, Netherlands, Spain and the United Kingdom have also introduced similar schemes. The underlying rationale is to stimulate investment into the research and development sector by providing tax incentives, which governments justify on the grounds that the successful innovation that results creates benefits for the public at large that compensate for lost tax revenue.

IP box regimes can be broadly divided into two categories. The first (adopted by France, the Netherlands and the United Kingdom) provides for qualifying revenue to be taxed at less than the standard rate. The second category (adopted by Belgium, Cyprus, Hungary, Luxembourg and Spain) exempts a specified proportion of revenues. This second category further subdivides into schemes that exempt a proportion of gross revenues and those that exempt a proportion of net revenues.

Intellectual property is an increasingly important element in the value of modern-day businesses and intellectual property projects lend themselves to crossborder planning by reason of the mobility of intellectual property rights, which do not consist of physical assets and so can be easily moved between different jurisdictions and tax systems according to prevailing circumstances and developments. By introducing the IP box Cyprus hopes to consolidate its position as a hub for the cross-border holding and exploitation of intellectual property rights.

The Cyprus exemptions, which took effect from January 1, 2012, apply to all expenditure for the acquisition or development of intangible assets incurred by a person carrying on a business. They apply to all categories of intellectual property, including the rights set out in the Patent Law of 1998 as amended, the Intellectual Property Rights Law of 1976 as amended and the Trademarks Law, Cap. 268 as amended.

Principal features of the Cyprus IP box

The main features of the Cyprus IP box are as follows.

5-year amortisation period

The cost of acquisition or development of an IP right acquired by a Cyprus company may be capitalised and written off on a straight line basis over 5 years, giving an annual writing down allowance of 20 percent. Previously, amortisation rates were determined by reference to the estimated useful life of the underlying asset. For example, if a patent had a term of 20 years its useful life would be deemed to be 20 years and the writing down allowance would be 5 percent per year. The acceleration of writing down allowances will significantly defer tax liabilities and bring substantial cash flow benefits, particularly for larger items.

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This article appeared in BNA's European Tax Service and Tax Planning International Tax Review; published by Bloomberg BNA.

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