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    Amendments To The IP Box Regime In Cyprus



    An IP1 box is a special tax regime for intellectual property revenues. It is also known as intellectual property box regime, innovation box or patent box. The Patent Box regimes are designed to encourage companies to make profits from their patents by reducing the tax paid on those profits.

    The Cypriot IP box regime - the most favourable IP box regime within Europe and effective since 2012 - was notably amended in the middle of this year.


    The amendments to the taxation of the income from the exploitation or sale of intangible assets have been effective since 1 July 2016 and were passed in order to bring the Cypriot legislation in line with the provisions of the OECD BEPS2 Action 5 and within the new EU rules on the subject.


    Besides the new regulation the new law includes also transitional provisions for assets which qualified for the regime under the former legislation.


    THE TRANSITIONAL PROVISIONS cover intangible assets which are defined in:

    - the Patents Law,

    - the Trade Marks Law and

    - the Intellectual Property Rights Law.


    Persons who have entered the former IP Box regime are entitled to continue claiming the benefit of these transitional provisions until 30 June 2021.


    REGULATION OF THE NEW IP BOX REGIME contain the rules and conditions which are applicable for qualifying assets developed after 1 July 2016. Qualifying intangible asset are namely:

    - patents as defined in the Patents Law

    - computer software

    - other IP assets which are legally protected and they fall under one of the following: (utility models, intellectual property assets which provide protection to plants and genetic material, orphan drug designations and extensions of protections for patents etc.)


    Qualifying intangible assets refers to an asset that was acquired, developed or exploited by a person in performance of his business (excluding intellectual property associated to marketing) and which pertains to research and development activities, but does include intangible assets where only economic ownership exists.


    Business names (including brands), trademarks, image rights and other intellectual property rights used to market products and services are not considered as qualifying intangible assets.


    QUALIFYING EXPENDITURE

    Qualifying expenditure refers to the sum of total research and development costs incurred in any tax year, wholly and exclusively for the development, improvement or creation of qualifying intangible assets and which costs are directly related to the qualifying intangible assets.

    Qualifying expenditure includes, but is not limited to, the following:

    - wages and salaries,

    - direct costs,

    - general expenses relating to installations used for research and development etc.


    QUALIFYING INCOME

    Qualifying income means the proportion of the overall income corresponding to the fraction of the qualifying expenditure plus the uplift expenditure over the total expenditure incurred for the qualifying intangible asset.

    Income includes, but is not limited to the following:

    - royalties or other amounts in connection with the use of qualifying intangible asset and

    - any amount for a license for the operation of qualifying intangible asset


    CALCULATION OF TAXABLE INCOME

    80% of the overall profit derived from the qualifying intangible asset is treated as deductible expense. Every year the taxpayer may elect not to claim the whole or part of this allowance.


    For better understanding, please see below a table with sample calculation of taxable income and income tax respectively:


    Net income from royalties

    60.000

    80% tax exemption

    60.000*80%

    48.000

    Taxable income

    12.000

    12,5% Tax liability

    12.000*12,5%

    1.500

    Effective tax rate

    2,50%


    In the case of a resulting loss, only 20% of the loss can be surrendered to other group companies or be carried forward to subsequent years.


    ASSETS WHICH DO NOT QUALIFY FOR THE TRANSITIONAL PROVISIONS FOR THE IP BOX REGIME

    The cost of acquiring an intangible assets which does not qualify for the transitional provisions and which asset is used in furtherance of the business of the person can be amortized over the period of the useful life of the asset in accordance with accepted accounting principles with the maximum period being 20 years. In the case of sale of this intangible then a balancing statement must be prepared, the same way that such statement is calculated for fixed assets. Goodwill does not qualify for amortization.



    It can be summarized that the new legislation narrowed the scope of intellectual property rights that can benefit from the amended IP BOX regime. Yet, the 2.5% tax rate that was set also through the former regulation, remains without changes.

    1 Intellectual property

    2 Base erosion and profit shifting (BEPS) refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.

    Advokátní kancelář Vašíček, Frimmel & Honěk