On 4 November 2016 the House of Representatives of Cyprus approved changes to the existing preferential tax treatment of income from the exploitation and/or sale of intellectual property (IP BOX). The purpose of the adopted amendments is to align Cyprus tax law with the provisions of Action 5 of the BEPS plan and the new EU rules for taxation of comparable IP BOX tax regimes.

Transitional provisions

The current IP BOX tax regime provides for an 80% tax exemption on income from the use of intangible assets after deducting all direct expenses, such as amortization (more than five years) and interest expense, and also 80% of income from the sale of intellectual property. If there are losses, then only 20% of the losses can be transferred to other companies of the group or carried forward to future periods.

According to the transitional provisions, taxpayers applying the existing IP BOX regime may do so until 30 June 2021 for intangible assets that were acquired:

  • before 2 January 2016; or
  • directly/indirectly from an affiliate between 2 January and 30 June 2016 (and the affiliate should also have applied the IP BOX tax regime to such assets); or
  • from an independent party or developed between 2 January and 30 June 2016.

If items of intellectual property were acquired directly or indirectly from an affiliate during the period between 2 January and 30 June 2016 and they do not fall under the above provisions, then the transitional period for such companies is limited to 31 December 2016.

What has changed?

The updated IP BOX tax regime applies to assets created after 30 June 2016. Such assets should be acquired, developed or used in the Cyprus company's activity as a result of research and development done by the Cyprus company itself. The intellectual property also needs to be used in the company's activity and generate annual gross income of not more than EUR 7.5 million, or EUR 50 million if the income is generated by a group of companies. Intangible assets to which the updated IP BOX regime applies are patents, computer programs and other intellectual properties that are not obvious, useful and new. Preferential tax treatment will not be granted to "marketing" intellectual properties, in particular, to trademarks, images, etc.

A company applying the IP BOX regime will have to keep track of income and expenses for intellectual properties for which the tax benefits are granted. Such accounting should make it possible to determine a connection between the income from the intellectual property (to which the IP BOX tax regime applies) and costs related to that property.

The changes will affect the ability to enjoy Cyprus IP BOX tax benefits. However, there are new opportunities for structuring intellectual property ownership through the Cyprus jurisdiction, in particular, by concentrating a staff of employees developing intellectual property in Cyprus, which is already reflected in practice, especially in IT-industry. Changes to IP BOX tax regime seem most interesting for IT investors specializing in the development of software, computer games, in IT consulting and other industries associated with the sale of intellectual property rights.

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