IP Box Regime

What is Intellectual Property (IP)?

IP is a category of property that includes intangible creations of human intellect. Such as inventions, innovative algorithms and formulas, software programs, trade-secrets and know-how, manufacturing practices, marketing concepts, artistic works, designs, images, names, and inventions used in commerce.

Why is it beneficial?

IP assets do not have a geographical nexus and can be relocated without significant costs. Multinational companies use this on their benefit to reduce and plan the overall tax burden of the group companies’ resident in countries with advanced IP box regime.

How it is classified?

Anything that is considered qualifying intangible asset can be added to the IP complying that is related to the acquisition of IP or to the development of the IP.

IP is classified as a non-current asset in the financial statements and it is amortized over the period of years according to the Regime of each country.

IP Box Regime in Cyprus

Under the Principal of the IP BOX Regime in Cyprus the following features apply

80% of the profits qualifying for the regime are exempt from tax, the rest 20% is tax at corporation rate of 12.5% giving an effective tax rate of 2.5%
From 5 up to 20 years amortization period
0% tax on gain from disposal of the IP if it is classified as capital nature transactions

Qualifying Assets

Qualifying assets can be developed within the company.

Patents
Software programs with a copyright
Other intangible assets that is not obvious but are useful and novel.

Calculating the IP Box Regime To calculate the IP Box regime, we need to use the Nexus Fraction which determines the range of qualifying profits relevant to the deductions on the taxpayer.
Terms:
Overall income (OI)	OI is calculated as the gross income minus direct expenditure. This consists of the capital allowances of the assets, royalties received for the use of non-tangible assets, income from the trade of disposable QA, and embedded income originating from the qualifying asset. It does not include capital gains from QA disposal.

Qualifying Expenditure (QE)	QE can be salary/wages, direct costs, general expenditure linked to R & D activities, and R&D expenditure from independent sources. It does not include any expenses of IP acquisition, paid or payable interest, any costs payable to related persons handling R&D, and costs that cannot prove a direct link with specific QA.

Uplift Expenditure (UE)	The expenditure is calculated as a less 30% of QE.

Overall Expenditure	All the expenditure of the company
Formula

PRACTICAL EXAMPLES

To put things in perspective, we set out some numerical examples illustrating how, under the new IP regime, one would reach the QP stage on which 80% notional deduction would be applied.

The major factors in the examples are:

whether the asset was internally developed or whether it was acquired, and
whether R&D costs were outsourced to related parties or to third parties.

The following cases will be examined:

The asset was developed or improved internally, with R&D costs being undertaken by the company itself.
The asset was acquired, with subsequent R&D costs for improvements of the asset being were outsourced to non-related parties.
The asset was acquired, with subsequent R&D costs for improvements being outsourced to related parties.

	Case 1	Case 2	Case 3
Overall Income (OI) from qualifying IP	€1,000,000	€1,000,000	€1,000,000
Cost of acquisition of asset	N/A	€300,000	€300,000
R&D costs, incurred internally	€500,000	N/A	N/A
R&D costs, outsourced to non-related parties	N/A	€200,000	N/A
R&D costs, outsourced to related parties	N/A	N/A	€200,000
Overall Expenditure (OE)	€500,000	€500,000	€500,000
R&D costs, incurred internally	€500,000	N/A	N/A
R&D costs, outsourced to non-related parties	N/A	€200,000	N/A
Qualifying Expenditure (QE)	€500,000	€200,000	N/A
30% of the qualifying expenditure	€150,000	€60,000	0
Total cost of acquisition + cost of outsourcing to related parties	0	€300,000	€500,000
Uplift Expenditure (UE)	0	€60,000	0

For the purposes of the examples, the following figures are used :

Applying the above figures to the formula for calculation of the Qualifying Profit (QP) and the tax benefit of up to 80% as a notional deduction, we have:

As a result, the IP tax benefit will be:

Case 1: Taxable profit will be decreased by €800,000 notional expense – 2.5% effective corporate tax rate

Case 2: Taxable profit will be decreased by €416,000 notional expense – 7.3% effective corporate tax rate

Case 3: No notional expense applies – 12.5% effective corporate tax rate

Why Cyprus IP Box?

Cyprus applies to a wider range of income compared to other European schemes.
Lowest percentage of tax rate on
One of the highest percentages of exempt qualifying profits

	Qualifying Profit (QP)	Notional Deduction (80% of QP)
Case 1:	€1,000,000 x [(€500,000 + €0) / €500,000]	€1,000,000	€800,000
Case 2:	€1,000,000 x [(€200,000 + €60,000) / €500,000]	€520,000	€416,000
Case 3:	€1,000,000 x [(€0 + €0) / €500,000]	€0	€0

IP Box Regime

Ariadne