In May 2012 Cyprus introduced what’s commonly referred to as the IP Box, a number of tax exemptions and incentives relating to intellectual property rights, writes Heather Landau
Unlike physical assets that have a defined location, intellectual property isn’t bound by geographical constraints and can be moved between countries, each with their own unique tax systems.
The choice of where to base your IP holding company has become a key strategic decision for a company’s’ board of directors and Cyprus, with the lowest rates throughout the EU, has become the preferred choice for company formation and incorporation.
Amid opposition to the scheme, changes to the law now mean that companies looking to take advantage of Cyprus's IP box regime, have until mid June 2016 before new entrants will no longer be permitted.
Historically the majority of a company’s value consisted of physical assets where large factories, warehouses and equipment provided tangible wealth that was easy to define. The technology and software boom of recent years has shifted the value of a company towards intangible assets where ideas, microchips, innovative products, software and data are the cornerstones of many successful businesses.
The purpose of the scheme was to create a low tax environment in order to attract research and development activities, promote innovation and investment towards new technology. When compared to other countries with favourable tax box schemes that typically range from 5% to 10% (UK, Belgium, Luxembourg, France and Spain), Cyprus has a maximum effective rate of 2.5% that has helped pave the way for it to become one of the most attractive jurisdictions for holding intellectual property rights.
While there is usually a trade-off when selecting the jurisdiction for an IP company, with each country having its own set of advantages and disadvantages, this isn’t typically the case for Cyprus with the country being the clear leader in almost every aspect.
Using Cyprus as an IP box applies to all areas of intellectual property including trademarks, patents, creative works, copyright and software. Anyone registered before 2016 can benefit from significant savings until 2021, whether this is in the form of royalties, or from the disposal of IP rights.
Advantages of holding IP rights in Cyprus
- 80% of the net revenue derived from royalty income is exempt from corporate tax
- During the disposal of intellectual property, 80% of capital gains are exempt from tax, with the remainder taxed at 12.5%
- By carrying out a share disposal of the holding company rather than the asset, this can further reduce the tax on capital gains to zero
- Cyprus is signatory to over 50 double tax treaties, a number of which have no withholding tax on royalty income and others ranging between 5% and 10%.
Who qualifies under the law?
- The IP right must be owned by a Cyprus company and should be used for the production of taxable income
- The ownership of the qualifying IP may come either through acquisition or through the actual development by a Cypriot company
- If ownership of the qualifying IP is obtained through acquisition, this can be achieved through either cash purchase or the acquisition of the company via share capital.
The opposition from countries which believed the scheme offered preferential treatment has resulted in an agreement that ultimately affects the opportunities available. Considering there is only a limited time to enter the Cyprus scheme, it’s advisable that any organisation with significant IP assets examines their options while the opportunity exists.