Cyprus IP Incentives
Cyprus has renewed and expanded research and development (R&D) incentive programs to support the growth of the hi-tech industries located on the island.
The Cypriot Income Tax Law (‘ITL’) provides for an Intellectual Property (‘IP’) box regime which is effective as of 1 July 2016.
The regime links the tax benefits with research and development expenses (“R&D expenses”) incurred by the taxpayer, i.e. qualifying taxpayers are eligible to claim a tax deduction (calculated based on a Nexus ratio) equal to 80% of qualifying profits resulting from the business use of the qualifying asset. A taxpayer may elect not to claim the deduction or only claim a part of it.
A super deduction of 20% on the actual amount of the relevant R&D expenses is available for R&D expenses incurred during the tax years 2022, 2023 and 2024 (including expenses of a capital nature).
This deduction is not available to taxpayers that claim a deemed deduction under the provisions of the IP Box regime.
Incentives available and description of benefits
The tax incentives offered under the ITL are the following:
- IP Box deduction: 80% of the qualifying profits arising from a qualifying asset (subject to conditions, as discussed below) pushing the effective tax rate to as low as 2.5%.
- R&D super-deduction: all expenses for scientific research, and all R&D expenses, as recognized by international accounting standards, that have been incurred by a person who carries on a business and has the economic ownership of the relevant intellectual property asset will be treated as tax deductible. An additional deduction equal to 20% of the actual amount of the relevant R&D expenses is available for R&D expenses incurred during the tax years 2022, 2023 and 2024 (including expenses of a capital nature) to taxpayers that do not claim a deemed de-duction under the IP Box regime.
- CIT exemptions:
- Gains from the disposal of IP assets is not subject to CIT provided they are of a capital nature transaction (recommended to be confirmed in a tax ruling).
- Gains from the sale of shares are unconditionally exempt from CIT in Cyprus. This exemption applies irrespective of the holding period, number of shares held or trading nature of the gain.
- Dividend income is conditionally exempt from tax.
- Foreign exchange (‘FX’) differences are tax neutral for CIT purposes in Cyprus. Any FX gains should not be taxable and FX losses should not be deductible.
- Personal Income Tax (‘PIT’) exemptions:
- 20% or €8.550 exemption (lower of)
- An Individual can claim the above exemption on the remuneration that is generated from first employment that is exercised in Cyprus if all the below apply:
1) The Individual was employed outside of Cyprus for an employer not resident in Cyprus for 3 consecutive years prior to the commencement of his/her employment in Cyprus.
2) The exemption can be claimed for maximum 7 years following the year of employment.
3) Applies to employment which commenced after 26/07/2022 and up until the year 2027 inclusive.
- 50% exemption
- is granted in any year in which the remuneration from first employment in Cyprus exceeds €55.000, irrespective of whether in any tax year the said remuneration falls be-low €55.000, provided that during the 1st or 2d year of employment in Cyprus the said remuneration exceeded €55.000 annually.
- is granted for a period of 17 years, commencing as of the year of employment in Cyprus.
- the Individual should have been resident outside of Cyprus for at least 10 consecutive years prior to the commencement of his/her employment in Cyprus.
- Applies to the employment which commenced after 01/01/2022.
- Notional Interest Deduction (‘NID’) on new equity capital: This deduction applies to businesses which generate taxable income (income generated from IP activities should in general qualify). NID is restricted to 80% of the taxable income resulting from the use of the new capital before NID. NID does not apply in case of tax loss/break even position.
- IP Amortisation Period: All intangible assets (excluding goodwill), irrespective of whether they are qualifying assets or not, are eligible for amortisation over their useful economic life for a maximum period of up to 20 years (the exact amortisation period to be confirmed in a tax ruling).
- Tax credits: Foreign tax paid or withheld on profits and gains of a Cypriot tax resident company can be credited against any Cypriot tax payable provided sufficient and appropriate evidence exists. Such tax relief cannot exceed the Cypriot tax payable on the same income or gain in the same income tax year. Any excess foreign tax credits which are not utilised cannot be set-off against other sources of income and cannot be carried forward to future periods.
IP Box eligibility requirements
The Nexus Approach
On 14 October 2016, the Cyprus House of Representatives passed amendments to the Income Tax Law in order to align the current IP tax legislation with the provisions of Action 5 of the OECD’s Base Erosion and Profit Shifting (BEPS) project.
• Limits application of the IP Box Regime where R&D is not performed by the Cypriot taxpayer but is outsourced to related parties.
• The approach links the benefits of the regime with the R&D expenses incurred by the taxpayer.
Qualifying Intangible Asset (‘QA’)
A qualifying intangible asset is an asset acquired/ developed/ exploited by a person within the course of carrying out their business. QAs comprise in particular patents and computer software.
The following assets are specifically excluded from the IP Box regime:
• Business names
• Image Rights
• Other Intellectual property rights used for marketing of products and services
Qualifying Expenditure (‘QE’)
Qualifying expenditure include:
• R&D expenditure incurred by the taxpayer (including R&D expense incurred by a foreign branch of the Cypriot IP holding company)
• Unrelated party R&D outsourcing expenditure
• Direct expenditure (salaries and other expenses relating to R&D)
Overall Income (‘OI’)
The overall income comprises of the gross income earned from the qualifying asset during the tax year minus any direct cost incurred for generating the income.
It includes, but is not limited to:
• Income of disposal of a qualifying asset (excluding profit of a capital nature)
Uplifting Expenditure (‘UE’)
The Uplifting Expenditure is the lower of:
• 30% of the Qualifying Expenditure and;
• The total acquisition cost of the QA and any R&D costs are outsourced to related parties
Overall Expenditure (‘OE’)
Overall Expenditure means the total capital expenditure either qualifying or not, relating to the creation of the Qualifying IP i.e., cost of acquisition of the qualifying asset plus the cost of outsourcing to related parties, etc.
Where the calculation of qualifying profits results in a loss, only 20% of this loss may be carried for-ward or group relieved.
The taxpayer may forego the whole or part of the deduction in each year of assessment.
IP and jurisdictional requirements
"Qualifying intangible asset" means an asset acquired, developed, or exploited by a person
in the course of a business and which is intellectual property (with the exception of intellectual property related to marketing) and which is the result of research and development activities. "Qualifying intangible asset" includes an intangible asset for which there is only economic ownership.
There is no requirement that the R&D be performed within Cyprus for the expenditure to be classified as ‘Qualifying Expenditure’.
Role of governmental bodies in administering incentives
The competent authority is the Cyprus Tax Department (‘CTD’). The possibility to benefit from the IP Box Regime is not subject to a prior administrative approval, however, a confirmation via a tax ruling from the CTD is strongly recommended.
Companies claim the relevant IP Box or R&D super deduction as part of their Income Tax Return (Form TD4) filing, which is due within 15 months from the end of the year of assessment, e.g. 2023 Income Tax Return is due by 31 March 2025.
· IP Box regime provisions can be found under Section 9(1)(k) of the ITL and Income Tax (Intangible Assets) Regulations No. 336/2016
· R&D super deduction provisions can be found under Section 9(1)(d) of the ITL
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