On 14 October 2016 the Cyprus Income Tax Law (ITL) was amended, effective as from 1 July 2016, introducing a new IP box regime. The new provisions align the Cyprus offering on the taxation of the income from the exploitation or sale of intangible assets with the provisions of Action 5 of the OECD/G20 Base Erosion and Profit Shifting (BEPS) initiative.
In accordance with the OECD BEPS Action 5 report, Cyprus has abolished the existing Cyprus IP box, with effect from 30 June 2016, with transitional rules applying until 30 June 2021 for companies already making use of the old regime (applicable with restrictions). The new Cyprus IP box which has been introduced and is effective as from 1 July 2016 provides for a 80 per cent deduction for qualifying profits from qualifying IP. This results in an effective tax of 12.5 per cent (which is the headline corporate tax rate in Cyprus) on only 20 per cent of the qualifying profits. Qualifying IP types will include those intellectual property assets developed by a person as a result of research and development activities such as patents and copyrighted software, whereas marketing related IP such as trademarks, image rights and brand names will not qualify. Qualifying profits will be determined under the OECD/G20 BEPS Action 5 nexus approach.
Transitional Arrangements
For companies benefitting from the old regime, there are phase out provisions in accordance with which companies may continue to claim the old benefits until 30 June 2021, with respect to intangible assets which (ii) were acquired before 2 January 2016 or (ii) were acquired directly or indirectly from a related person during the period from 2 January 2016 until 30 June 2016 and at the time of their acquisition were benefiting under the IP Box regime or under an equivalent EU scheme or (ii) were acquired from an unrelated person or developed during the period from 2 January 2016 until 30 June 2016. A shorter transitional period till 31 December 2016 applies for IPs acquired directly or indirectly from a related person during the period from 2 January 2016 till 30 June 2016. In all cases, intangible assets qualifying for the transitional rules are those which as at 30 June 2016 either generated income or their development has been completed.
Conclusions
The amendments align Cyprus with international developments on substance and economic activity, while maintaining the flexibility and tax efficiency for which the jurisdiction has come to be known and recognised. The new IP box regime retains the 80 per cent deduction and the benefit of an effective corporate tax rate of 2.5 per cent but introduces economic filters for the type of asset and income that will qualify. In conjunction with the tax perks introduced for managers earning over €100,000 per annum moving to Cyprus (for whom a 50 per cent deduction will apply for the first ten years) and the new non-domicile rules exempting qualifying Cyprus residents from defence tax on interest, rents and dividends, the new IP tax regime is expected to entice companies to physically bring their research and development ventures, staff and knowhow, and set up in Cyprus to benefit from a comprehensive tax friendly, EU and OECD compliant package.