NEW CYPRUS IP BOX REGIME – REGULATIONS

Rules of the altered “nexus approach underlie the new IP System. In accordance with this approach, the immaterial asset has to meet requirements of the regime. For this, the direct connection between qualified gain and own qualified expenditures that facilitate such a gain has to take place. In other words, the figure that is amount to 80% of qualified gain, obtained from qualified immaterial assets will be approved as a tax-deductible expenditure. 

According to the altered legislation Qualifying Intangible Assets is known as and asset that was obtained, devised or used by an individual during the performing his activity (it doesn’t relate to IP of marketing) and is a product of R&D (research and development) activities that encompass intangible assets of economic ownership.  Qualifying intangible assets include: 
  • Patents as explained in the Patent Law; 
  • Computer software; 
  • Additional IP assets with the legal security. 
Qualifying profit (QP) is known as a share of total gain earned from qualifying asset that is equal to the share of qualified expenditures (QE) + the uplift expenditures over the overall expenditures (OE) spent on the qualified intangible asset. A following formula will help to make calculations and get the amount of qualified gain:

formula

OI – Overall Income:
  • Royalties and other earning that arises during the applying of intangible assets.
  • License gain from bargains with qualifying intangible assets.
  • Any amount obtained from insurance or as reimbursement regarding qualifying intangible assets.
  • Income from the implementation of qualifying intangible assets.
QI – Qualifying Expenditures:
  • Salary
  • Direct costs
  • General costs regarding the installations for R&D
  • Commission costs regarding R&D
  • Costs regarding R&D that were transferred to the outsource to third parties.
UE – Uplift Expenditures:
  • 30% of qualifying expenditures
  • Total cost of purchasing qualifying intangible assets + outsourced costs.
OE – Overall Expenditures:
  • Corresponding costs;
  • Total cost of purchasing qualifying intangible assets + outsourced costs.

Individuals claiming advantages of the new IP regime are responsible for the conducting due accounting books and register there every income as well as expenditure regarding intangible assets.

Expenses for the purchasing of an intangible asset that does not correspond to the transitional regulations, and which asset is aimed on the business support, can be amortized over the asset’s useful life, according to the approved accounting provisions, with a maximum period of 20 years.

So, as an example, by using aforementioned formula, we can see the next calculation:

formula cy 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
Thus, the greatest benefit in terms of taxation in Cyprus is received by the companies that create and improve intellectual property products independently.

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