Back in 2012, Cyprus amended its tax legislation aiming to create an attractive and secure Intellectual Property (IP) 1 regime. With only three years forward in time, the combined efforts by the private and government sector paid off placing the island in the elite ranking of IP preferred jurisdictions both in the EU and worldwide.
Justifying its designation as a prominent IP location, Cyprus successfully blends all prerequisites needed for such a nomination: A low Corporate Income Tax rate (12.5%), a wide network of signed Double Tax Treaties (more than 50 as of 2015), eligibility to benefit from the “EU Interest and Royalty Directive”, no capital gains tax allowing for the tax free disposal of IP shares to local companies by non-resident shareholders, zero withholding tax on royalty payments and finally zero or low withholding tax on royalties received.
Companies may elect Cyprus as their base for managing an IP right or even as an intermediate destination for sublicensing the IP right to various other destinations. The imminent tax benefits provided by the aforementioned legislation for such an election are briefly described below:
Exemption of 80% on profits derived from the IP
The exemption is applied after all direct expenses (like amortization and financing costs) are deducted from the gross profits earned.
Exemption of 80% on profits from the disposal of the IP
The exemption is applied after all direct expenses are deducted.
Amortization Provisions
The cost of an acquisition or development of an IP right can be amortized over a 5 year horizon. In arithmetic terms this translates into a 20% amortization per year, as opposed to much lower amortizations that are often used in other jurisdictions and which are directly related to the useful life of the IP (e.g. a copyright with a useful life of 20 years would call for an annual amortization of just 5%)
Effective Tax Rate less than 2.5%
Indirect expenses that can be substantiated are also eligible for deduction. This combined with the exemption of all direct expenses and the corporate tax rate of 12.5% results in a tax effective rate that can be lower than 2.5%. This compares favorably with the Netherlands (5% effective tax rate), Luxembourg (5.76%) and Belgium (6.8%).
In addition to the above, Cyprus legislation calls for any dividends generated and delivered to non-residents to be exempt from Cyprus tax of any sort hence allowing foreign shareholders to receive profits from the IP exploitation with minimal tax leakage. An ever increasing number of companies acknowledge the many benefits of Cyprus as an IP location choosing to base their headquarters for IP management in the island.
Conspectus Services Ltd. stands ready to assist with any query relating to structuring, registering and administrating an IP management company.
1 The term Intellectual Property includes a wide range of intangibles like copyrights, patents and trademarks.