IP BOX Regime

The Cyprus IP Box is a tax incentive scheme that grants eligible corporations an up to 80% tax deduction on qualifying profits, which translates to a 2.5% effective corporation tax (the lowest within EU). This scheme is in alignment with the OECD/G20 Base Erosion and Profit Shifting (BEPS) Action 5 report.

Please see below definitions and requirements:

Qualifying Assets

• Patents,

• Utility models,

• Copyrighted software,

• IP assets that grant protection to plants and genetic material,

• orphan drug designations,

• extensions of patent protection, and

• other IP which are non,

• obvious, useful and novel, that are certified as such by a designated authority, and where the taxpayer satisfies size criteria (i.e. annual IP related revenue does not exceed €7,5m for the taxpayer, and group total annual revenue does not exceed €50m, using a 5 year average for both calculations)

The qualifying IP assets need to be legally and/or economically owned.

Please note that tradenames, including brands, trademarks, image rights and other IP rights used for the marketing of goods and services do not qualify.

Qualifying Profits

• Royalties or other amounts in relation to the use of qualifying IP,

• Amounts for the use of a license for the exploitation of qualifying IP,

• Amounts derived from insurance/compensation in relation to qualifying IP,

• Trading income from the sale of qualifying IP,

• IP income embedded in the sale of products services or the use of processes directly related with qualifying IP assets.

R&D Fraction

A fraction is applied to the qualifying IP profits based on R&D activity. More specifically, the qualifying IP profits are multiplied by the R&D fraction (modified nexus fraction) to arrive at the relevant IP profits that qualify for the 80% deduction under the new Cyprus IP Box.

The R&D fraction is calculated as: (QE+UE) x QA

OE

Where:

• QE is the business’ qualifying expenditure on relevant R&D incurred wholly and exclusively for the development, improvement or creation of the qualifying IP, specifically excluding, inter alia, acquisition expenditure and expenditure on outsourcing to related parties,

• UE is the lower of: -

  • 30% of QE, and

  • expenditure on acquisitions and outsourcing to related parties

• OE is the sum of QE and expenditure on acquisitions and outsourcing to related parties,

• QA is qualifying IP profits.

Example:

OVERALL INCOME (OI)	5,000,000
Cost of acquisition of asset	300,000
R&D costs, incurred internally	500,000
R&D costs, outsourced to non-related parties	200,000
R&D costs, outsourced to related parties	200,000
OVERALL EXPENDITURE (OE)	1,200,000
R&D costs, incurred internally	500,000
R&D costs, outsourced to non-related parties	200,000
QUALIFYING EXPENDITURE (QE)	700,000
30% of the qualifying expenditure	210,000
Total cost of acquisition + cost of outsourcing to related parties	500,000
UPLIFT EXPENDITURE (500,000 * 30%)	210,000
FORMULA:
QP = OI X (QE + UE)/OE	3,791,667
80% DEDUCTION	3,033,333