|Cyprus as an ideal IP location|
Cyprus recently reformed its Intellectual Property ("IP") tax regime by introducing an 80% tax exemption on IP related profit. This now constitutes the island as one of the most attractive and preferred IP locations in the EU and worldwide.
Intellectual Property (IP) can be one of the most valuable assets of an organisation. Choosing the right location for the centralisation and management of IP is a very important strategic business decision. The ideal location to establish an IP structure is one that can serve the organisation's business strategies/model, safeguard and protect its IP and contribute to its tax optimisation.
Cyprus offers an efficient IP tax regime coupled with the protection afforded by EU Member States and by the signatories of all major IP treaties and protocols.
IP-rich organisations can achieve in Cyprus an effective tax rate as low as 2% from their IP exploitation and at the same time enjoy the protection afforded by the EU and all major international IP treaties and protocols.
The Cyprus IP tax regime
The IP tax regime covers a wide range of intangibles including:
- Copyrights, which may take any of the following forms: literary works, dramatic works, musical works, scientific works, artistic works, sound recordings, films, broadcasts, published editions, databases, publications, software programmes,
- Patented inventions
- Trademarks (and service marks), designs and models that are used or applied on products
The above is a non-exhaustive list.
Other points include:
- The IPs involved may be registered in Cyprus or abroad. Registrable IPs need not be registered in Cyprus to benefit from IP regime.
- Cyprus legal system has been fully harmonized with EU IP directives and regulations
- Major related IP International Treaties and Protocols have been ratified
- Cyprus company is relatively easy to set up and cost efficient to maintain
- No thin capitalisation rules (i.e. the Cyprus company can be financed in any combination of debt and equity)
Tax benefits of Cypriot IP companies
The new as well as the old provisions provide exemptions from tax of income related to IP. More specifically:
- As from 1 January 2012 profits from the use or sale of IP will be reduced by 80% (i.e. be tax exempt) before being taxed at the flat corporate income tax rate of 12.5% which is among the lowest in Europe. This brings the effective tax rate on IP income to as low as 2%.
- For an IP owning company: As from 1 January 2012 the acquisition or development cost of an IP will be amortized by 20% per annum (i.e. 5 year straight line depreciation for tax purposes)
- For an IP company involved in back-to-back licensing arrangements: Where an IP is licensed to the Cyprus company and in turn the Cyprus company sublicenses it, thin (small) spreads are accepted
- The expenses of a Cyprus company are tax deductible to the extent that they are incurred wholly and exclusively for the production of the company's own income
- All the above exemptions are also available for IPs acquired or developed before January 2012
- Availability of foreign tax credit (deduction) for foreign tax suffered (e.g. foreign withholding tax) against Cyprus tax resulting from the same income
- No Cyprus withholding tax on payments of royalties abroad unless the royalty is used in Cyprus
- No Cyprus withholding tax on dividend distributions or liquidation payments to non-Cyprus residents
- Disposing the shares of a Cyprus company attracts no taxation in Cyprus (provided it holds no immovable property in Cyprus)
- Profit of foreign branch (e.g. acting as the IP owner) is tax exempt in Cyprus under conditions
- No exit taxes
Cyprus' wide double tax treaty network and access to the EU Interest and Royalty Directive serve as additional means for the group to achieve tax optimisation when it comes to IP exploitation through Cyprus.
* Expenses include finance costs to acquire/develop IP and annual tax amortisation.
The above is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Libor Ltd will be glad to assist you in this respect. Please contact us for appropriate professional advice.