The current law enacted as from 1 July 2016 and is fully compliant with the provisions of Article 5 of the OECD BEPS project following the “ Modified Nexus Approach” which this approach only allows to taxpayer to benefit from an IP regime to the extent that it can show that it itself incurred expenditures, such as R&D, which gave rise to the IP income.
Under Cyprus IP regime, an allowance (in the form of notional expense deduction) is given on qualifying profit resulted from a qualifying IP. The allowance can be up to 80% of the qualifying IP profit.
The key characteristics of the regime are as follows:
a) Definition of a qualifying asset:
Is an asset that has been acquired, developed or exploited from a person during his performance of his business and it constitutes of Intellectual Property and is the result of Research and Development (R&D) activity. It does not include IPs relating with marketing activity. Includes however IPs for which only economic ownership exists (legal ownership might be in another company/jurisdiction for legal protection).
b) Assets that can be qualified:
b) Computer Software
c) Other IP assets that are legally protected and are
1. Non-obvious, useful or novel
2. Orphan drug designations, utility models etc
business names, brands, trademarks, image rights and other intellectual property rights used for the marketing of products and services
c) Calculation of qualifying profits (for on which 80% notional expense will be calculated):
The qualifying profit is the result of the following formula (as expressed in the legislation):
((QE + UE) / OE) x QA
QE means qualifying expenditure (QE) for qualifying intangible asset
UE means uplift expenditure (UE)
OE means total/overall expenditure (OE) for qualifying intangible asset and
QA means total profit derived from the qualifying intangible asset
QE - is defined as the sum of all R&D costs incurred during any given tax year wholly and exclusively for the development, improvement or creation of qualifying intangible assets, and which costs are directly related to such assets.
UE - is the lower of:
i) 30% of the qualifying expenditure; and
ii) the total cost of acquisition of the qualifying intangible assets, plus the cost of
outsourcing to related parties of any R&D activities in relation to such assets.
OE - is the sum of
i) the qualifying expenditure; and
ii) the total cost of acquisition of the qualifying assets, plus the cost of outsourcing to related parties of any R&D activities in relation to these assets, incurred during any tax year.
QA - is the total income received from the IP less any direct costs incurred for generating the income. Direct costs include all costs incurred (directly or indirectly) wholly and exclusively for the purpose of generating the income from IP + the IP amortization cost + notional interest on capital contributed in the Cyprus company to finance the development of the asset.
d) Tax rate:
The effective tax rate can be as low as up to 2,5% on IP profits (if a company).
It should be noted that, in order to take benefit of the Cy IP Regime, that the Cyprus Company/Person performs R&D expenditure for the IP.