On the 27th October 2016 the Official Gazette published the amendments to the Income Tax Law of Cyprus with the incorporated new Intellectual Property (IP) regime that has been passed by the House of Representatives. The Income Tax Law provides the transitional phase between the existing IP regime and the new IP regime being in line with the recent international developments on the taxation of IP incomes and recommendations under action 5 of the OECD’s Base Erosion and Profit Shifting project.

Existing IP regime

The new provisions contain guidance on the amended IP regime application and allow the existing IP regime to remain in place until the 30^th June 2021. To recall, the existing IP regime provides an exemption from taxes of 80 per cent of the net profit.
 
Net profit is calculated after deducting from the IP income all direct expenses associated with the production of the income as well as capital allowances at a rate of 20 per cent.

The IP regime will be effective until the stated date for intellectual property existing as of the 1^st January 2016 or developed or acquired from non-related persons between the 2^nd January 2016 and the 30^th June 2016. Intellectual property acquired from related parties between the 2^nd January 2016 and the 30^th June 2016 will be entitled for the existing IP regime until the 31^st December 2016.

The New IP Regime and Nexus Approach

The new IP regime presents the notion of qualifying profits that are eligible for the 80 per cent tax exemption calculated on the basis of the nexus approach and relate to intellectual property that is entitled for the new regime of qualifying assets.

The qualifying assets are stated in the new provisions of the legislation and include amongst others patents, copyrighted software programs and other intangible assets that are non- obvious but exclude trademarks and other copyrights.

The nexus approach is based on R&D expenditure incurred to develop the qualifying assets. Thus, the level of profits eligible for the 80 per cent tax exemption will depend on the level of R&D expenditure incurred by the taxpayer to develop the qualifying assets.

Under the new regime there is no income tax imposed on capital gains arising from the disposal of a qualifying asset and the capital gains arising of such disposal are not included in the qualifying profits.

The new IP regime applies to Cyprus tax residents, non –tax residents with permanent establishment in Cyprus as well as foreign permanent establishments who are subject to tax in Cyprus.

The newly amended Income Tax Law introduces capital allowances for all intangible assets, excluding goodwill and assets qualifying for the existing IP regime.  

Tax Benefit

Since the new IP regime is in line with the internationally agreed latest tax framework, the experts argue that the new IP regime may enhance businesses set ups increasing R&D activities in Cyprus to benefit from the new tax regime. With a low corporate tax rate of 12,5 per cent and an exemption on qualifying IP income of 80 per cent, businesses can achieve an effective tax rate as low as 2,5 per cent when all R&D expenditure is gained by the Cyprus entity benefiting from the regime. Moreover, since an overseas Permanent Establishment of a Cyprus entity also may qualify for the IP regime, all qualifying expenditure incurred by such an entity is taken into account in the nexus division calculation, hence, increasing the tax advantage.

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