On the 14 of October the Cyprus Parliament has amended the Cyprus tax legislation and the favourable tax scheme applying for Intellectual Property Rights (collectively referred to as IP) and has refined to accommodate the new regulations and guidelines introduced by the OECD.
The new law allows for the existing schemes to continue to apply and phased out in 5 years by 30/6/2021.This applies for existing IP assets (as per the old definition) that were qualifying under the old regime definition as at 2/1/2016 and any IP assets acquired or developed from non related parties from 2/1/2016 to 30/6/2016. It will also apply for IP assets acquired from related parties from 2/1/2016 to 30/6/2016 provided that such IP assets would have been eligible to qualify under the provisions of the current Cyprus IP regime or a similar IP regime of another state or the main purpose of the acquisition was not the reduction of taxation. If these assets are not eligible to claim the current provisions of the Cyprus IP regime then they can claim the scheme up to 31st December 2016 only.
The 80% exemption of the income received from qualifying IP rights after deducting direct expenses remains as well as the 80% exemption of the profit from sale of the qualifying IP right. 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.
A New Qualifying IP rights term is introduced which is now restricted to patents, computer software, as well as IP assets which are non-obvious, useful and novel and from which the income of a taxpayer does not exceed, in a 5 year period, €7.500.000 per annum (€50.000.000 for taxpayers forming part of a Group). It does not include trademarks including brands, image rights and other intellectual property rights used for the marketing of products or services.
As per the OECD guidelines the Nexus approach applies which limits the benefit, if research and development is outsourced to related parties. The new scheme -Nexus approach- requires sufficient substance and connection between expenses the IP asset and the IP income in order to benefit with the IP box regime. A formula is introduced to identify the qualifying profits that can benefit from this regime.
( (Qualifying expenditure + Up lift expenditure 30%)/total expenditure)x Total IP Income= Qualifying profit
Research and Development costs attributed to related parties are not qualifying expenditure unlike costs attributed to unrelated parties. By this way the qualifying profit is proportionality reduced by the % of related party outsourcing expenses. However a 30% uplift of qualifying expenditure is offered.
The law is effective from 1st July 2016.
Please contact a member of our staff for further information and/or clarifications.