Cyprus has recently announced new measures aimed at increasing the number of companies incorporated in the island and to provide incentives to non-EU nationals to invest in the country. In this bulletin we will concentrate on the new Intellectual Property regime.

New Intellectual Property (IP) Regulations.

The government of the Republic of Cyprus has established a new tax regime for companies with Intellectual Property – including copyrights, patents, trademarks, designs, etc.

The law, which applies only to IP acquired or developed, allows for 80% of the net profit generated from the utilization of IP to be exempted from corporate income tax. As before, the calculation of net profit would be after the deduction of direct expenses such as interest expense relating to financing the acquisition, amortization costs, legal/audit fees, etc.

This means that, for a company acquiring Intellectual Property, the net corporate tax rate in Cyprus, already the lowest in the EU at 10%, would be reduced to only 2%. Please note that this reduced rate can be further reduced, because the purchase price or any expenses of a capital nature incurred in the acquisition or development of the IP are also eligible for 20% capital allowances per year.

Example:

A Cyprus company develops/buys Intellectual property for €1,000,000.
Royalty Income from licensing of the IP is €500,000 per year;
Direct costs for the production of royalty income are €100,000 per year.

Calculation of Tax Payable:
€
Royalty Income 500,000

Direct Costs for production of royalty income (100,000)

Less: Amortization (20% of devlpnt/acquisition
Cost) (200,000)

Net Profit 200,000

Less: New Law for Tax Deduction (80%) (160,000)

Adjusted Net Profit 40,000

Tax Payable 4,000

The effective tax rate is, therefore, reduced to 0.8%!! (€4,000/€500,000).

The new law has retroactive effect (as of from January 1, 2012) and, therefore, any acquisitions or developments of IP since that date would fall within its provisions.