Amendments have been recently presented by the Cyprus government as to the income tax laws in order to bring the Cypriot legislation in line with the provisions of the OECD, as regards to the taxation of the income from the exploitation or sale of intangible assets.

Provisions composing the new IP Box Regime in Cyprus:

Qualifying intangible assets

“Qualifying intangible asset” refers to an asset that was acquired, developed or exploited by a person in continuance of his business (except intellectual property related to marketing) and that is a result of research and development activities whilst also covers intangible assets for which only economic ownership exists.

These assets include:  a) patents as defined in the Patents Law b) computer software c) other IP assets that are nonobvious, beneficial and novel, in those cases where the person who uses them in continuance of a business does not generate annual gross revenue more than Euro 7.500.000 (in case of a group of companies not exceeding Euro 50.000.000)

Qualifying profits

“Qualifying profits” refers to the proportion of the overall income equivalent to the portion of the qualifying expenditure incurred for the qualifying intangible asset.

Overall income

The 80% of the overall income resulting from the qualifying intangible asset is treated as deductible expense.

“Overall income” arising from the qualifying intangible asset has the meaning of the gross income accrued within the tax year, less the direct costs for producing such income. Direct costs cover all direct and indirect costs incurred in earning the income from the qualifying intangible asset, including the amortization of the cost of the intangible, and also notional interest on equity contributed to finance the development of the qualifying intangible asset.

Though, in case of a resulting loss, only 20% of that loss can be surrendered to other group companies or be carried forward to subsequent years.

Qualifying expenditure

“Qualifying expenditure” for qualifying intangible asset refers to the sum of total costs of research and development that incurred in any tax year, absolutely and exclusively for the development, improvement or creation of qualifying intangible assets and which costs are directly connected to the qualifying intangible assets.

Qualifying expenses include, but are not limited to:

• wages and salaries;
• direct costs;
• general expenses relevant to installations that were used for research and development;
• expenses for supplies in connection with research and development activities;
• costs associated with research and development that has been outsourced to non ­related persons

An up­lift expenditure will be added to the costs above, which means the lower of 30% of the eligible costs or the full amount of the cost of acquisition and outsourcing to related parties aimed at research and development in connection to the eligible intangible asset.

Accounting records

Any person who claims benefit under the above regime is obliged to maintain proper books of account and records of income and expenses for every intangible asset.