The new IP regime (known also as a patent box, innovation box or IP box) is fully compliant with international developments relating to the tax treatment of IP income and recommendations under the OECD's BEPS project. Under the new regime, 80% of qualifying profits generated from qualifying assets will be deemed to be tax deductible expenses.
The criteria of the Cyprus Intellectual Property Regime typically include originality, creativity, and novelty. To qualify for intellectual property protection in Cyprus, the work or invention must be original and not a copy of someone else's work. It should also demonstrate a certain level of creativity and innovation. Additionally, the work must be new and not previously disclosed or published. These criteria help determine whether a particular creation is eligible for intellectual property rights in Cyprus.
Calculation of taxable income
80% of the overall income derived from the qualifying intangible asset is treated as deductible expense. Every year the taxpayer may elect not to claim the whole or part of this allowance. In the case of a resulting loss, only 20% of the loss can be surrendered to other group companies or be carried forward to subsequent years. Therefore, applying to Cyprus corporate tax rate of 12.5%, which is among the lowest in the EU, provides the effective tax rate of 2.5% only.
Tax treatment of the sale of the intangible asset
On 17 July 2020, the Cypriot House of Representatives approved a bill amending Section 9(1)(l) of the Income Tax Law which introduced a few changes with respect to the tax treatment of intangible assets. Intangible assets such as patents, trademarks, copyrights, and goodwill are generally treated as capital assets for tax purposes, therefore 0% tax on the gain from disposal of IP assets as a capital nature transaction.
Accounting records and capital expenditure
Capital expenditure related to IP acquisition or development may be deducted in the first tax year in which the expense was incurred as well as in the subsequent years. The amortization is over a period of up to 20 years.
Any person who claims benefit under the above regime is obliged to maintain proper books of account and records of income and expenses for each intangible asset.
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.
