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The Taxation of Intellectual Property

Intangible Property (IP) can be one of the most valuable assets of an organisation.  Intangibles account for some three-quarters of the Fortune 500’s total market capitalisation.  Furthermore, IP assets absorb US$1 trillion of investment funds every year; roughly the same as total corporate investment in physical assets.

If IP is critical to your business, choosing the right location for the centralisation and management of IP is a key strategic business decision. The ideal location to establish an IP structure is one that can serve the organisation’s business strategies and model, safeguard and protect its IP, and contribute to its tax optimisation. 

After important revisions to the Cyprus Income Tax law in 2012, Cyprus is now at the forefront of IP tax planning.  This memo provides a summary of how Cyprus can offer an efficient IP tax regime, coupled with the protection afforded by EU Member States and by the signatories of all major IP treaties and protocols.

Intellectual Property 

As defined in Article 2 (viii) of the World IP Convention of 1968 of which Cyprus is a signatory, Intellectual Property includes “literary, artistic and scientific works (copyright); performances of performing artists, phonograms and broadcasts (copyright); inventions in all fields of human endeavour (patents); Scientific discoveries (patents); industrial designs; trademarks, service marks and commercial names and designations (trademarks); protection against unfair competition, and all other rights resulting from intellectual activity in the industrial, scientific, literary and artistic fields”.

Changing the landscape of Intellectual Property 

Why choose Cyprus as a holding jurisdiction for IP? Cyprus is a fully transparent and reputable financial centre, a full member of the European Union, and a well established holding company jurisdiction. Cyprus has implemented a new IP regime, expected to stimulate growth driving sectors of IP exploitation and Research and Development.  Resting on a sound legal system based on Common Law principles, and being a signatory to International Conventions on the Protection of Intellectual Property, Cyprus’ IP tax regime is now considered the most favourable in Europe, affording the maximum protection, stability and assurance for IP owners

IP Protection in Cyprus 

The protection of IP rights is dealt with extensively in Cyprus. There is a comprehensive system in place that guarantees the results of innovation and creativity are protected at a European and International level.

The EU Directives and Regulations relating to IP protection fully apply and have been introduced into Cyprus domestic legislation. 

a) Patents  

With regards to patents, a new invention is protected in the following ways: 

  1. A patent certificate is granted by the Patent Office of the Department of Registrar of Companies and Official Receiver for protection at national level.
  2. A European Patent issued by the European Patent Office, for protection at EU level. 
  3. An International Patent certificate is issued under the provisions of the Patent Cooperation Treaty, administered by the World Intellectual Property Organisation (WIPO).

b) Trademarks/Service Marks/ Designs  

As far as Trademarks/Service Marks and Designs are concerned, protection is granted in the following ways: 

  1. Registration under the provisions Trademark Law Cap.  268 offering protection at a national level. 
  2. EU Regulation 207/2009 of 26 February 2009 on the Community Trademark and EU Regulation 6/2002 of 12 December 2001 on the Community Design offer uniform protection throughout the territory of the European Union. 
  3. Cyprus being a signatory to the Paris Treaty on the Protection of Industrial Property, as administered by the World Intellectual Property Organisation (WIPO) and a party to the Madrid Protocol, offers global protection of trademarks, service marks and designs. 
c) Copyrights
  1. Copyrights vest automatically in works and are protected in Cyprus under Law N.59/76 on the Protection of Intellectual Property.
  2. Cyprus is a signatory to the Bern Convention for the Protection of Literary and Artistic Works and the Rome Convention on Performance, Production and Broadcasting covering a broad range of rights, including software copyrights. Both Conventions have been transposed into Cyprus legislation.  Consequently, copyright in works governed by the said International Treaties is automatically recognized in Cyprus with no further process being required. 

Tax Benefits

In addition to the favourable IP tax rules introduced in 2012, Cyprus offers an extensive double tax treaty network that ensures withholding tax optimisation on royalty payments that may arise from IP arrangements and access to all EU Tax Directives. 

It should be noted that under the majority of Cyprus double tax treaties, the withholding tax on royalty payments is 0%.

 The IP Box Regime in brief 

  • An 80% exemption on profits derived from the sale of IP assets.
  • An 80% exemption on the net profits derived from the use of IP assets.
  • No recapture system for previously generated losses – losses can be carried forward for up to five years.
  • Gross IP income reduced by all direct expenses incurred wholly and exclusively for the production of IP income. 
  • Competitive tax amortisation provisions over a five year period (i.e. 20% per annum).
  • Wide range of qualifying IP assets, including internally developed IP assets.
  • Effective Tax rate of 2.5% or less.

Taxation of Royalty Income (Practical Example) 

A Cyprus tax resident company holds IP rights of EUR 50,000 and derives royalty income amounting to EUR 100,000 incurs directly related expenses of EUR 30,000 and is allowed a tax amortisation of EUR 10,000 (being 20% of the EUR 50,000).

Income from royalties   €100,000
Direct expenses   (€30,000)
Tax amortisation   (€10,000)
Net Profit from royalties   €60,000
80% Statutory exemption €60,000 * 80% (€48,000)
Taxable Income   €12,000
Tax Liability 12,000 @ 12.5% €1,500
Effective tax rate   2.5%

Taxation of Disposal of IP Proceeds

A Cyprus tax resident company disposes an IP right for EUR 1,000,000. The cost of the acquisition was EUR 500,000 and amortisation was claimed for two years. Under the new IP Regime the proceeds from the disposal will be taxed as follows:

Sales proceeds   €1,000,000
Less: Cost of acquisition   (€500,000)
    €500,000
Add back: Amortisation claimed   €200,000
    €700,000
80% Statutory exemption €700,000 * 80% (€560,000)
Taxable Income   €140,000
Tax Liability €140,000 @ 12.5% €17,500
Effective tax rate   1.75%

IP companies in the EU

There are 12 European countries currently operating Intellectual Property (IP) Box tax regimes that provide substantially reduced rates of corporate tax for income derived from important forms of intellectual property.  Recently, the Economic and Financial Affairs Council (ECOFIN) has been investigating the 12 above referenced countries regarding their IP Box tax regimes.

The following is a summary of the agreement recently reached with all 12 countries:

  1. IP Box rules will continue to apply up to 30 June 2016.
  2. After 30 June 2016, and until 30 June 2021, only existing IP Box companies can continue applying the beneficial IP Box regime.
  3. Such “existing structures” can also introduce new IP within their structure up to 30 June 2021.  
  4. After 30 June 2021, normal local CIT rates will apply to income derived from intellectual property.  In the case of Cyprus, the current CIT rate of 12.5% is the second lowest in Europe, and compares favourably to other IP Box jurisdictions such as Luxembourg, and the UK.  

Cyprus Qualifying Intellectual Property rights

QUALIFYING IP RIGHTS CONDITIONS QUALIFYING IP INCOME
Copyrights Acquired or developed post 1 January 2012 Royalty payments
Registered Patents   Damages
Registered Trademarks   Capital Gains
Service Marks    
Software    
Trade secrets    
Know-how    
Client lists    
WIP R&D    
Artistic and literal works (i.e. rights to book, movie etc.)    

In Cyprus, IP rights include patents, trademarks/service marks, designs/models, internet domain names, software copyrights, secret formulae, know-how, work in process R&D, lists, rights related to scientific, literary or artistic work, and rights related to industrial or commercial work.

It is important to note that an IP right registered outside Cyprus, on a European or International level, is eligible for the benefits of the IP Box Regime. In addition, in the case of internally developed IP rights, there is no requirement for the research and development to be undertaken in Cyprus.

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