October 14, 2016 in order to bring legislation into line with the BEPS requirements (plan to counter the erosion of the tax base and output gains from taxation), the Government of the Republic of Cyprus passed a law that introduces a number of amendments to existing intellectual property regime (hereinafter – the EC).
These amendments to the IP regime came into force on 07.01.2016 year.
It should be noted that until now existed in Cyprus IP regime has not been approved by the majority of EU member states, as well as been widely criticized.
So, focus on the main points of the IP regime change which, in our view, require attention.
First, once it is worth to note that the tax rate for the use of intellectual property (hereinafter – IS) unchanged at 2.5%.
To determine the qualifying EC introduced a modified factor relation criterion (modified nexus approach). According to this criterion, the definition of qualifying IP narrowed. This factor suggests a link between the cost of the development of IP, most IP and income produced by the IP data objects. In this approach, the taxpayer must itself carry out research and development work (hereinafter – R & D).
In addition, a special formula has been derived for determining the qualifying income:
KP (qualifying income) = (amount of qualifying expenses + costs within the “allowance”) / (total R & D costs) * total income from the use of IP.
It is worth noting that in the modified mode of R & D costs incurred permanent establishment of the company (hereinafter – PP) outside Cyprus are considered qualifying expenses (in expenses covered by the new regime). The only condition is that the profits of PP should be subject to tax in Cyprus on the basis of the corresponding application in the tax declaration (declaration is not subject to review). In addition, if the profits of a foreign PP taxed in another country, the Cyprus tax is practically not occur on the basis of the foreign tax set-off mechanism.
Also, it should be noted that the transitional provisions were introduced, according to which the provisions of the existing IP regime will apply to 31.06.2021 year.
Thus, the provisions of the existing IP regime shall continue to apply in respect of:
- existing IP assets;
- IP assets acquired (directly or indirectly) from affiliated entities in the period from 02.01.2016 on 30.06.2016, if they meet the criteria of the new IP regime;
- IP assets acquired from an independent person or independently developed in Cyprus in the period from 2 January to 30 June 2016.
According to these amendments, under a qualifying IP subject:
- computer software;
- the IP assets that are non-obvious, and useful innovation, as well as the income from which does not exceed EUR 7.5 million. per year (50 ml for taxpayers that are part of the group).
At the same time, are not subject to amendment brands (including brands), marketing of IP objects, as well as branding rights.
Also, it should be noted that the mentioned amendments introduced requirements tracking income and expenses in the accounting records (tracking of income and expenditure). That is expected to maintain separate accounting for research and development costs in terms of dividing them in qualifying and not qualifying.
Intellectual property created as a result of expenses not qualifying type, will not be covered under the new regime, in profit from the use of IP assets will be taxed at a rate of 12.5%.
Our lawyers are closely watching the changes in the legislation of EU member states. If you want to keep abreast of changes in areas of interest to you, we are always ready to provide you with qualified legal advice.