The Cyprus House of Representatives approve legislative proposals for a revised intellectual property (IP) box regime on October 14 2016.
The changes are significant and will have a direct impact on existing or planned structures.
The relevant amendments intend to harmonise the domestic legislation with recommendations under Action 5 of the OECD's BEPS Project and the conclusions adopted by the ECOFIN Council on December 8 2015.
The revised legislation has retroactive effect from July 1 2016. The specific provisions comprising the new IP box regime in Cyprus are summarised below.
Qualifying intangible assets
Qualifying intangible assets refer to assets that were acquired, developed or exploited by a person in the course of his business (excluding IP associated with marketing) and which pertains to research and development activities for which economic ownership exists. Specifically, these assets are:
- Patents as defined in the Patents Law;
- Computer software;
- Other IP assets that are non-obvious, novel and useful, where the person which utilises them in the further development of a business does not generate annual gross revenues exceeding €7.5 million ($8 million) (or €50 million for a group of companies) and which should be certified by an appropriate authority either in Cyprus or abroad; and
- Utility models, IP assets that provide protection to plants and generic material, orphan drug designations and extensions of protections of patents, all of which should be legally protected.
It should be noted that rights used for the marketing of products and services such as business names, brands, trademarks, image rights, etc. are not considered as qualifying intangible assets.
Qualifying profits (income) relates to the proportion of the total income that relates to the fraction of the qualifying expenditure, as well as the uplift expenditure that was incurred for the qualifying intangible asset. Such income, for example, consists of royalties in connection with the use of the qualifying intangible asset and capital gains arising on the disposal of a qualifying intangible asset, among others.
The overall income refers to the total income arising on the qualifying intangible asset within a specific tax year reduced by the direct costs for generating this income.
As with the previous IP box regime, 80% of the overall income as defined above is treated as a deductible expense, and in the same manner as losses only 20% of the loss can be carried forward or be surrendered for the purpose of group loss relief.
Qualifying expenditure for a qualifying intangible asset relates to the total R&D costs incurred in any tax year wholly and exclusively for the development, improvement, or creation of qualifying intangible assets and where costs are directly related to the qualifying intangible assets.
Examples of such qualifying expenditure includes wages and salaries, direct costs relating to the R&D, including costs that have been outsourced, supplies related to R&D, installations used for R&D, among others.
An uplift expenditure is added to the above mentioned qualifying expenditure which is the lower of:
- 30% of the eligible costs; or
- The total amount of the cost of acquisition and outsourcing to related parties aimed at R&D in connection to the eligible intangible asset.
Proper books of accounting and records of income and expenses must be kept for each intangible asset by any person who wishes to claim the above described benefit.
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