Following the recent amendments of the Cyprus tax legislation a more favourable taxation regime has been introduced for royalties and Intellectual Property Rights (collectively referred to as IP).
The main points are:
- 80% of the income received from IP rights after deducting direct expenses is now exempt.
- Furthermore 80% of the profit from sale of the IP right is also exempt.
- The acquisition cost and related capital expenditure for the development of the IP can amortised in the year incurred and the 4 following years. In effect a 20% tax allowable amortisation on straight line basis.
- Qualifying IP rights
So the effective tax rate on the IP income can be less than 2%.
Working Examples:
1. IP Income taxation example
| Gross IP Income | +80,000 | |
| Direct Expenses onIP* | -50,000 | |
| Administration expenses | -2,000 | |
| Accounting profit before tax | =28,000 | |
| 80% Statutory Exemption | (80,000 – 50,000)*80% | -24,000 |
| Taxable Profit | 28,000-24,000= | +4,000 |
| TAXATION | 10% | +400 |
| EFFECTIVE TAX RATE | 400/80,000 | 0.5% |
* Direct expenses can be expenses carried out exclusively for the development of the IP or license fees paid to main licensor in case Cyprus company is a sub licensee.
2. Disposal of IP rights example
The Cyprus company owner of the IP right disposes it for 4,000,000 euro. The IP right was initially purchased 3 years ago for 1,250,000. As per the new regime the following calculations apply:
| Disposal Proceeds | +4,000,000 | |
| Purchase Cost | -1,250,000 | |
| =2,750,000 | ||
| Add back: Amortization claimed for the 3 previous years which reduced the respective year’s taxable profit |
20% = 250,000 x 3 years= | +750,000 |
| =3,500,000 | ||
| 80% Statutory Exemption | 3,500,000 x 80% | -2,800,000 |
| Taxable Profit | =700,000 | |
| TAXATION | 700,000@ 10% | +70,000 |
| EFFECTIVE TAX RATE | 70,000/4,000,000 | 1.75% |
Important notes:
- IP rights that qualify include patents, trademarks, service marks, designs, software, trade secrets , clientele, and copyrights.
- The law is effective from the tax year 2012 onwards.
- Further benefits include no withholding tax on dividends paid by the Cyprus company to foreign shareholders and owners. There is also no withholding tax on interest paid and royalties rights payments (for income not generated in Cyprus).
- Cyprus extensive double tax treaty network and the adoption of the EU tax Directives means that IP income can be received in Cyprus with zero or very low withholding tax from third countries. Even in this case were there is a withholding tax in the third country this tax can be used as a tax credit on any tax arising in Cyprus.
- A Cyprus company which owns an IP right can protect its asset in different ways. For example it can obtain a National, European or International patent certificate or register any trademarks or designs under local law provisions, EU regulations or the Paris treaty and Madrid protocol which Cyprus is a party of. Copyrights are also protected by local law and the Bern convention member states
Please contact a member of our staff for further information and/or clarifications.