Cyprus Ideal IP Location

Cyprus introduced new rules on taxation of income from intangible assets which are commonly referred as “Intellectual Property (IP)”. These rules are effective as of 1 January 2012.

Cyprus as an EU Member State has domestic laws which govern IP and are based on English Law. Furthermore, any European Laws related to IP are applicable. Cyprus is signatory of various international conventions – such as the Paris Convention for the protection of Industrial Property – as it has ratified the Treaty and Regulations of the World Intellectuals Property Organization (WIPO), Trademark Law Treaty etc.

The IP tax regime covers a wide range of intangibles assets including, but not limited to:

1.                   Copyrights (Literature, Theatre, Films or Movies, Science, Art, Sound Recording, Broadcast, Publishing, Database, Publications, Software programs, Software games)

2.                   Patented Inventions

3.                   Trademarks and service marks, designs and models that are used or applied to products

To benefit from the IP rules, the Cyprus Company (CyCo) has to be a legal owner of the “qualifying intangible asset (IP)” and has to report it as an asset on its financial statements which are prepared under IAS & IFRS. In addition, regarding the acquired IP rights, the acquirer CyCo is not obliged to further develop the IP in order to benefit from the regime.

The Tax Benefit of Cyprus companies:

1.                    80% of any profits arise from IP rights is exempt from income Tax (the deduction of 80% is not for accounting purposes only for Tax).

The deduction is applied to net profits arising from:

–          The use of the IP (includes compensation for improper use of such assets)

–          The disposal of IP

The 80% rule applies after deducting all direct expenses, such as amortization of the IP, interest expense to finance the acquisition or development of the IP, as well as any other direct expenses.

2.                    Acquisition and Research & Developments expenses/cost. Expenditures for the acquisition and development of IP (of a capital nature) are amortized on a straight line over a 5 year period.

Research and Development expenditure of a trading (renewed) nature is expensed.

3.                    No Cyprus Withholding tax on payments of royalty abroad unless the royalty is used in Cyprus.

4.                    No Cyprus Withholding tax on payments of dividend to non-Cyprus residents.

5.                    Sale of share of CyCo, owners of IP with no properties in Cyprus, has no taxes in Cyprus.

6.                    Double Tax Treaty applies to reduce tax in Cyprus as it concerns the foreign tax credit (deduction) for foreign tax suffered against Cyprus tax resulting from the same income.

The above is intended to provide a general guide to the subject matter. Please contact our tax specialist Mr Savvas T. Savva at savvas@scaudit.com to receive some advice related to your subject matter.

Example 1:

Copyright was acquired in 2012         €2,000,000
Royalty fee in 2012 €800,000
Direct expenses related to copyright in 2012                  €50,000
Interest on the loan which is used to acquire in 2012 €60,000
Administration expenses €18,000
Selling expenses €12,000
Depreciation expenses on tangible assets             €20,000

CypIdeal1If the Owner is not a tax resident of Cyprus then Dividend Tax 0%.

Example 2:

Sale of IP through CyCo.

Sale of copyright in 2013 €3,000.000 which was purchased in year 2008 for €1,000.000. Estimation of useful right of the copyright 15 years. Amortization / depreciation as of year 2012 5/15 * €1.000.000=€333,333.

Commission paid for the sale €50,000.

CypIdeal2If the Owner is not a tax resident of Cyprus then Dividend Tax 0%.

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