After the approval of the Cypriot Parliament on October 14, 2016, the new Cypriot intellectual property regime (IP) is in force. The provisions of the IP box regime, in line with the latest international developments on the taxation of IP income and recommendations under action 5 of the OECD’s BEPS project, apply retroactively as from July 1, 2016.
The new IP regime follows the modified “nexus approach.” According to this approach, there should be sufficient an essential nexus between the expenses, the IP assets and the related IP income in order to benefit from a patent box regime. Under the nexus approach, the application of an IP regime should be dependent on the level of Research and Development (R&D) activities carried out by the qualified taxpayer. In other words, 80% of qualifying profits generated from qualifying assets will be deemed to be tax deductible expenses, and in case of losses only 20% of the loss will be carried forward or be surrendered for the purpose of group loss relief.
Qualifying profits (QP) are defined as the proportion of the overall income (OI) derived from the qualifying asset, corresponding to the fraction of the qualifying expenditure (QE) plus the uplift expenditure (UE) over the overall expenditure (OE) incurred for the qualifying intangible asset.
The amount of qualifying profit can be derived through the application of the following formula:
QE + UE
QP = OI x —————
Overall income (OI) derived from qualifying assets is defined as the gross profit from the assets. It includes the following items:
Royalties or any other amounts relating to the use of qualifying assets;
Any amount for the grant of a license for the exploitation of the qualifying assets;
Any amount relating to the insurance or compensation of the qualifying assets;
Trading income from the disposal of the qualifying asset;
Embedded income on qualifying assets, which is derived from the sale of goods, the provision of services or use of any process that are directly related to the qualifying assets.
Qualifying expenditure (QE) relating to a qualifying asset is the sum of all R&D expenditure incurred in any tax year wholly and exclusively for the development, enhancement or creation of a qualifying asset and that is directly related to that asset. Qualifying expenditure includes the following items:
Salary and wages;
General expenses associated with R&D activities;
Commission expenditure associated with R&D activities;
R&D expenditure outsourced to unrelated parties.
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