In 2012, Cyprus introduced significant changes to its royalty tax regime with the amendments to the Income Tax law, thereby making Cyprus the ultimate royalty jurisdiction, enabling it to compete with other well established jurisdictions like Luxemburg and the Netherlands.
The changes to the Income Tax law became effective from January 2012, and apply to all categories of intellectual property: patents, trademarks, copyright, formulas, design, know-how process, literary works, dramatic works, musical works, scientific works, artistic works, sound recordings, films, broadcasts, published editions, databases, publications, software programmes etc.
In accordance with the new tax regime, Cyprus as an IP Box jurisdiction provides for favorable tax treatment in relation to income generated from IP rights, whether in the form of royalties or disposal of IP. The benefit a Cyprus company enjoys from the new legislation includes an exception from Corporate Tax of 80% of the net revenue derived from royalty income. In other words, only the remaining 20% of the IP revenue, after deducting costs related to the generation of it, will be subject to the 12.5% Corporate Tax.
In real terms, the company's effective tax rate will be 3% or less, taking into consideration all capital allowances and expenses, thereby making Cyprus the lowest European IP Box jurisdiction.
Key points to consider:
- Any expenditure of a capital nature for the acquisition or development of IP is claimed as a tax deduction in the year in which it was incurred and the immediate four following years on a straight-line.
- The 80% exemption also applies for capital gains arising in case of disposal of the IP. But in this case, a full tax exemption from capital gains tax applies, if the shares of the IP Company are sold.
- In the event that IP related costs and deductions exceed revenue earned from IP assets, the loss may be offset against other income for the year or future profits.
Other benefits relating to the IP Box held by a Cyprus company include 0% Withholding Tax upon distribution of dividends to non-Cyprus tax residents.
In addition, as Cyprus is member of European Union, the EU royalty directive applies, under which a royalty paid by other EU countries to a Cyprus royalty company is also with zero withholding tax.
In the case of non-EU countries with which Cyprus has favorable double tax treaties, lower or zero withholding taxes on royalties apply, and tax credits are issued against Cyprus taxation, e.g. Double Tax Treaty with Russia: 0% withholding tax on royalties. In the case of the Double Tax Treaty with Ukraine, 2% withholding tax on royalty applies, but a tax credit is issued reducing tax paid in Cyprus at the effective rate of 2.5%
The Cyprus IP box regime applies to a wider range of income than any other European scheme, most of which restrict benefits to income from patents and supplementary patent certificates. There is no cap on benefits, no requirement regarding self-development of the IP, and there are no restrictions on where the expenditure on acquisition or development of IP is incurred.
Yaniv Habari is the founder of Y. Habari & Co. LLC, a boutique corporate and commercial law firm based in Cyprus.
Published by Globes [online], Israel business news - www.globes-online.com - on December 2, 2014
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