Cyprus has recently introduced a package of incentives and tax exemptions relating to income from intellectual property rights, aimed at stimulating investment in research and development. A number of other countries, including Luxembourg, the Netherlands, Ireland and the United Kingdom have already introduced such schemes, which have come to be known as an intellectual property box (or IP box).
The relevant amendments to the Income Tax Laws are effective from January 1 2012 and apply to all expenditure for the acquisition or development of intangible assets incurred by a person carrying on a business.
Four fifths of the profit earned from the use of intangible assets (including any compensation for improper use) is disregarded for tax purposes. In addition, four fifths of any profit resulting from the disposal of relevant intangible assets is disregarded for tax purposes.
The net effect of the new scheme is that the rate of tax on income from the exploitation of intellectual property will be 2% or less. Since there are no taxes on dividends paid to non-resident shareholders, a Cyprus company can be used to generate royalties under licensing or similar arrangements with third parties and distribute profits to its shareholders by way of dividends with minimal tax leakage.
Cyprus's effective tax rate of 2% or less compares very favourably with the competition: the United Kingdom's new patent box regime gives an effective rate of 10% on relevant income. The Irish scheme is more complex, and it is not possible to directly compare rates, but it will generally produce an outcome close to the UK rate. The Luxembourg and Netherlands schemes are somewhat better, with effective tax rates of 5.76% and 5%, respectively, but they are both considerably less beneficial than Cyprus.
The new regime provides very attractive opportunities for structuring the exploitation of IP assets through Cyprus and in particular through the use of Cyprus-resident IP owners, especially in the context of Cyprus's extensive network of double tax treaties under which foreign withholding taxes on royalty income are either eliminated altogether or substantially reduced.
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