Major developments are currently in progress with regards to Intellectual Property (IP) tax regimes as part of the Organisation's for Economic Co-operation and Development (OECD) Action 5 of the Base Erosion and Profit Shifting (BEPS) Action Plan.
One of the approaches considered under Action 5 with regards to IP regimes is that there should be a "direct nexus" between income, tax benefits and Research and Development (R&D) expenditure.
In particular, this approach has to ensure that the major economic activities must be undertaken in the jurisdiction of the country in which the preferential tax regime for IP exists and requires that the tax benefits have to be connected with the R & D expenditures.
Further analysis as to the modified nexus approach and the grandfathering rules is provided to our article IP Tax Regimes: A New Tomorrow which can be found at the following link https://lnkd.in/dZYD5mk.
B. THE CURRENT CYPRUS REGIME
According to the current Cyprus regime, 80% of "Royalty Profit" generated from a Qualifying IP is considered as a deemed expense for corporation tax purposes. The remaining 20% is subject to the normal corporation tax rate of 12.5%.
The above principles also apply upon sale of a Qualifying IP and 80% of the profit from the sale of the Qualifying IP will be considered as a deemed expense and only the remaining 20% will be subject to the normal corporation tax rate.
Given the above mentioned possible changes which the OECD is considering, the current Cyprus Regime will change in the near future and the benefits gained from the Cyprus IP regime will be relevant only to royalties generated from Patents developed in Cyprus as explained in section C below.
Nevertheless there is an opportunity to benefit from the existing tax regime until 2021 provided that a company enters into the Cyprus preferential tax regime before June 2016.
In this respect with careful tax planning Trademark and Copyrights can still have tax savings from using the current tax regime for the next 6 years.
C. THE FUTURE OF CYPRUS IP BOX
Trademarks and Copyrights
As mentioned above Trademarks and Copyrights will continue to enjoy the benefits of the current Cyprus IP tax regime provided they will enter the Cyprus IP regime until June 2016.
In case they don't enter the scheme until June 2016 then they will not be able to benefit from the Cyprus IP regime.
The same rules with Trademarks and Copyrights apply also with Patents therefore if they enter the scheme before June 2016 the "grandfathering rules" will apply until 2021.
Under the new proposed scheme, Cyprus patent holding companies will still be able to benefit from the Cyprus IP tax regime after 2021, within the confines of the Modified Nexus. A Cyprus patent holding company, provided that it establishes substance in Cyprus for R&D purposes and there is direct connection between income and production, can use the Cyprus IP tax regime beyond 2021.
There is still a lot of work to be done to finalize the proposed provisions as stated above and clarification is needed for a number of issues in order for the new rules to be analyzed further and understood entirely by the business world. One thing is certain however, that businesses need to take the proposed changes from now into account when they structure their operations.
Cyprus with its infrastructure, supply of highly qualified personnel, lower operating costs and possibilities of obtaining EU funding, provides the optimum economic environment ability to a wide range of companies, whether small, medium or large, to establish themselves in Cyprus and continue to benefit from the Cyprus IP tax regime.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.