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On the 14th October 2016, the Cyprus Parliament approved the laws in relation to the amendment of the existing Cyprus Intellectual Property (IP) regime as published in the official gazette on 27th October 2016. The said amendments were made in order for the IP regime to be in line with OECD requirements Action 5 of the Base Erosion and Profit Shifting (BEPS) and have been incorporated in the Income Tax Law. The amendments are effective from the 1st July 2016 however there is five-year transitional period ie until the 30th June 2021 for those using the previous IP regime.
The previous IP regime will continue to apply until 30 June 2021 in relation to IPs that qualified for the previous IP regime before the 2nd January 2016.
Under certain conditions however, transitional rules will also apply to IPs that were developed or acquired during the period 2 January 2016 through 30 June 2016 provided that:
New IP regime
The new IP regime is in line with the OECD requirements and in effect gives an emphasis on research and development (R&D) of qualifying assets and the economic ownership.
In brief, under the new IP regime, a tax deduction equal to 80% of qualifying profits generated by qualifying assets will be applied by qualifying tax payers.
The qualifying profits are calculated by using the following ratio (the nexus fraction):
Qualifying profits = Overall income X Qualifying expenditure + Uplift expenditure
As shown in the ratio above, Qualifying profits means the proportion of the overall income corresponding to the fraction of the qualifying expenditure plus the uplift expenditure, over the total expenditure incurred for the qualifying assets.
Where the calculation of qualifying profits results in a loss, only 20% of this loss may be carried forward or group relieved in accordance with the provisions of Income Tax Law.
Overall income derived from qualifying assets is defined as the gross profit from the assets and includes amongst other:
Capital gains arising from the disposal of a qualifying asset under the new IP regime are not included in qualifying profits and are fully exempt from income tax.
Qualifying expenditure for qualifying intangible asset include, but are not limited to, the following:
However, the below expenditure is not considered qualifying expenditure:
Up-lift expenditure means the lower of 30% of the qualifying expenditure and the total amount of the cost of acquisition of the qualifying asset and any costs incurred for R&D outsourced to related parties.
Overall expenditure of qualifying assets is the sum of (i)qualifying expenditure, and (ii) the total acquisition cost of the qualifying assets and any R&D costs outsourced to related parties incurred in any tax year.
Qualifying assets mean assets acquired, developed or exploited by a person in the course of his business, (excluding intellectual property associated with marketing), are the result of R&D activities and the qualifying taxpayer is the economic owner of the assets.
These assets can be:
Business names (including brands), trademarks, rights to public presence, image rights and other intellectual property rights used to market products and services are not considered as qualifying intangible assets.
Qualified assets should be certified as “qualifying” by a Specialized Firm abroad.
Qualifying taxpayers that are eligible for the new IP regime include Cyprus tax resident persons, permanent establishments (PEs) of non-resident persons and foreign PEs that are subject to tax in Cyprus. The taxpayer can elect whether a foreign PE is taxable in Cyprus, so that the PE can be classified as a qualifying taxpayer.
Maintaining books and records
Qualifying taxpayers should maintain books and records for income and expenditure for each qualifying asset in order to accurately calculate the nexus fraction.
Capital allowances for all intangible assets (excluding goodwill and assets qualifying for the previous IP regime) are now allowable as a tax-deductible expense. Intangible assets will be amortised over the useful economic life of the asset, as determined by generally acceptable accounting principles (up to a maximum useful life of 20 years) and upon the disposal of such an intangible asset a balancing statement will be prepared (balancing addition being subject to income tax and any balancing deduction being tax deductible).
The new IP regime which is fully compliant with OECD requirements still remains very attractive resulting in a effective tax rate of 2.5%.
Royal Pine & Associates is a strong independent provider of trust and corporate services and provides comprehensive and specialized advice and services in all aspects of domestic and international business. Please contact us to find out more about the above matter.
Posted on Jul 24, 2017
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