In July 2016, the Government of Cyprus presented amendments to the IP box regime to the House of Representatives, the revised legislation focuses taxation of income from exploitation or sale of intangible assets pursuant to the OECD BEPS, Action 5 and conforming to EU laws.
The amendments of the IP box scheme and the revised legislation will be become effective as from 1 July 2016, once enforced by the House of Representative after summer recess.
The changes encompass both legislative amendments as well as implementation regulations for the transition and implementation to the new provisions of law. Changes also consist of transitional asset provisions, qualified under existing legislation, up to 30 June 2016 as well as covering intangible asset rules commencing as from 1 July 2016.
Transitional provisions for the current IP Box regime
The current Cyprus IP tax regime (enforced in Cyprus in 2012), includes a wide range of intangible assets defined in Patents Law, Trade Marks Law and Intellectual Property Rights Law, providing an 80% exemption of gross income tax from the use of intangibles further to all direct cost deductions from the total revenues (including interest and the amortization of the cost of the intangible over a 5 year period).
In the event of resulting loss, only 20% of the loss can be surrendered to other group companies or be carried forward to subsequent years.
There are transitional provisions which have been catered to allow for persons who have entered into an existing IP Box regime, continue claiming benefit until 20 June 2021, regarding intangible assets which:
- Have been acquired prior to 2 January, 2016 or
- Have been acquired directly or indirectly from related persons as from 2 January, 2016 up to 30 June 2016 and whose assets at time of acquisition were benefiting from the IP Box regime, or similar scheme or intangible assets in another state, or
- Those acquired from unrelated persons or instigated as from 2 January 2016 until 30 June 2016
Transitional provisions are also in place for intangible assets acquisition, directly or indirectly from related persons during the period of 2 January 2016 up until 30 June 2016, and that are not listed under the above provisions.
Income from qualifying intangible assets (i.e. those qualifying from transitional rules as at 30 June 2016, either generated income or intangible assets whose development has been finalised) will now also include embedded income and intangible assets where only economic ownership exists.
Persons who have acquired intangible assets up to 30 June 2016 may continue to claim benefit of existing IP box regime until 20 June 2021.
New IP Box provisions include:
1. Qualifying intangible assets
"Qualifying intangible assets" refers to an asset that was acquired, developed or exploited by a person in performance of his business (excluding intellectual property associated to marketing) and which pertains to research and development activities, but does include intangible assets where only economic ownership exists.
These assets are:
- patents as defined in the Patents Law
- computer software
- other IP assets that are non-obvious, novel and useful, where the person which utilizes them in further development of a business that doesn't generate annual gross revenues exceeding Euro 7.500.000 (or Euro 50.000.000 for a group of companies)
All above qualified intangible assets must be certified by a Specialized Firm abroad.
Those not treated as qualifying intangible assets include: business names, brands, trademarks, rights to public presence, image rights and other intellectual property rights.
2. Qualifying profits
"Qualifying profits" relate to the proportion of total income that corresponds to the fraction of the qualifying expenditure as well as the uplift expenditure across the total expenditure incurred for the qualifying intangible asset.
3. Overall income
"Overall income" relates to the gross income accrued within the tax year, after deducting direct costs for income generation.
80% of the income generated from the qualifying intangible assets is handled as a deductible expenditure.
Direct costs relate to all direct and indirect costs incurred in earning the income from the qualifying intangible asset, including the amortization of the cost of the intangible, as well as notional interest on equity contributed to finance the development of the qualifying intangible asset.
The overall income comprises of, but is not limited to:
- royalties or other amounts in relation to the use of qualifying intangible asset
- any amount for licencing of the operation of a qualifying intangible asset
- any amount received from insurance or as compensation in relation to the qualifying intangible asset
- capital gains and other income arising from the sale of a qualifying intangible asset
- embedded income of the qualifying intangible asset arising from the sale of products or through use of procedures that are directly related to this
4. Qualifying expenditure
"Qualifying expenditure" for a qualifying intangible asset relates to the total research and development costs incurred in any tax year wholly and exclusively for the development, improvement or creation of qualifying intangible assets and where costs are directly related to the qualifying intangible assets.
Qualifying expenditures include:
- wages and salaries
- direct costs
- general expenses relevant to installations used for R&D
- supplies expenses relating to R&D
- outsourced costs to non-related persons for the purpose of R&D
However Qualifying expenditure does not include expenses for
- acquiring intangible assets
- interest payable or paid
- costs related to construction or acquisition of immovable property
- amounts paid directly or indirectly to related persons for the conduct of research and development activities, irrespective of whether costs were relating to a cost sharing agreement
- costs that cannot be proved with a direct connection to the intangible asset
An up-lift expense will be added to the above costs, which means the lesser of:
- 30% of the entitled costs, or
- the total cost for acquiring and outsourcing to related parties for R&D relating to the eligible intangible asset
Accounting records
In order to claim benefit from the regime, any person is required to preserve proper books of account and income records and expenses for each intangible asset
Assets not qualifying for the IP Box regime
The cost of acquisition of intangible assets that are non-qualifying for transitional provisions, or in accordance with the new regulations where the asset is used for advancement of the persons business, the asset can be amortized over the period of the asset's useful life in agreement with the accepted accounting principles for the maximum period of 20 years.
In the event of the sale of the intangible, preparation of a balance statement is necessary, with the asset treated in the same way as a statement calculation of a fixed asset.
Savva & Associates can assist you with the implementation of a tax efficient Cyprus IP holding structure and handle all ongoing corporate statutory compliance matters. We are also well positioned to evaluate existing structures, and undertake IP valuation services.
For further information contact Mr Charles Savva at c.savva@savvacyprus.com who will be happy to assist you with your personal requirements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
