A. Qualifying intangible assets (QA)
As per the amended legislation, “qualifying intangible asset” is defined as an asset which was acquired, developed, or exploited by a person within the course of carrying out his business (except for intellectual property related to marketing), which is the result of research and development (R&D) activities, and which includes intangible assets for which only economic ownership exists.
Qualifying intangible assets comprise of:
Patents, as defined in the Patents Law
Other IP assets which are not obvious but are useful and novel.
The definition of qualifying intangible assets specifically excludes business names, brands, trademarks, image rights and other intellectual property rights used for the marketing of products and services.
B. Qualifying expenditure (QE)
Qualifying expenditure for qualifying intangible assets is defined as the sum of all R&D costs incurred during any given tax year wholly and exclusively for the development, improvement or creation of qualifying intangible assets, and which costs are directly related to such assets.
Qualifying expenditure includes, but is not limited to:
wages and salaries.
general expenses relating to installations used for R&D.
commission expenses associated with R&D activities.
costs associated with R&D that has been outsourced to non-related persons.
However, qualifying expenditure does not include:
costs for acquisition of intangible assets.
interest paid or payable.
costs for acquisition or construction of immovable property.
amounts paid or payable directly or indirectly to a related person to. conduct R&D activities, regardless of whether such amounts relate to cost sharing agreements.
costs which cannot be proved directly connected to a specific qualifying intangible asset.
Any expenditure for R&D that has been outsourced to non-related parties, as well as any expenses of a general nature for R&D which cannot be allocated to the qualifying expenditure of a specific qualifying intangible asset, can be apportioned pro rata to the qualifying intangible assets.
C. Uplift expenditure (UE)
An uplift expenditure is added to the qualifying expenditure, which will be equal to the lower of:
i) 30% of the qualifying expenditure; and
ii) the total cost of acquisition of the qualifying intangible assets, plus the cost of outsourcing to related parties of any R&D activities in relation to such assets.
D. Overall Income (OI)
Overall income is defined as the gross income earned from qualifying intangible assets during the tax year, minus any direct costs incurred for generating the income.
Overall income includes, but is not limited to:
royalties or other amounts resulting from the use of qualifying intangible assets.
license income for the operation of qualifying intangible assets
any amount received from insurance or as compensation in relation to qualifying intangible assets.
income from the disposal of qualifying intangible assets, excluding profits of a capital nature.
embedded income of qualifying intangible assets arising from the sale of products or services, or from the use of procedures that are directly related to the assets.
E. Overall Expenditure (OE)
Overall expenditure relating to qualified intangible assets is defined as the sum of:
i) the qualifying expenditure; and
ii) the total cost of acquisition of the qualifying assets, plus the cost of outsourcing to related parties of any R&D activities in relation to these assets, incurred during any tax year.
F. Qualifying profit (QP)
Qualifying profit (QP) is defined as the proportion of the overall income (OI) derived from the qualifying asset, corresponding to the fraction of the qualifying expenditure (QE) plus the uplift expenditure (UE) over the overall expenditure (OE) incurred for the qualifying intangible asset.
Qualifying Profits” are calculated by applying the following formula:
Qualifying Expenditure + Uplift Expenditure × Overall IP Income
Main Advantages of the Cyprus IP tax regime
The main aspect of the regime is that 80% of the profits qualifying for the regime are exempt from tax. This means that only the 20% of IP income is taxed at a corporate tax rate of 12.5%. Therefore, Cyprus-resident companies can essentially benefit from an effective tax rate of as low as 2.5%.
Other benefits include:
80% deduction of profits on disposal of IP rights
a 5-year amortization period which means that capital expenditure related to IP acquisition of development may be deducted in the first tax year in which the expense was incurred as well as in the subsequent 4 years. This in practice can lower the effective tax rate to less than 2%
0% tax on capital nature transactions – if the disposal of intangible assets is a capital nature transaction, then the resulting capital gain will not be taxable.
As from 1 January 2020, the following new provisions are put into effect:
Preparation of balancing statement in case of disposal of the IPs
The obligation (which was existed before) to prepare a balancing statement on the disposal of an intangible asset is abolished. As such, no balancing addition or balancing deduction would be included in the taxpayer’s taxable income in the year of disposal.
The taxpayer has the option not to claim capital allowances each year. Moreover, capital allowances that have not been claimed in a year are claimed over the remaining useful life of the asset. Consequently, the tax written down value of the IP at the beginning of each year will be recalculated over the remaining useful life of the IP.