Published on April 20, 2022

What is IP Box Regime?

IP Box Regime (known also as a patent box, innovation box or IP box) is a corporate tax regime used by many countries to incentivize research and development activities by taxing revenues deriving from licenses, royalties, patents, sale or transfer of qualified IP assets differently offering lower taxes compared to other commercial revenues.

Intellectual Property (IP) is a commonly used term which includes mind creation results such as software programs, innovative algorithms and formulas, inventions, trade-secrets and know-how, manufacturing practices, marketing concepts, artistic works, designs, images, names and inventions used in commerce. It is one of the most valued assets a company can have.

The IP assets may not have a fixed geographical nexus and can be relocated without significant costs. 85% of multinational companies use this flexibility to reduce overall tax burden by allocating valuable IP to group companies resident in countries with advanced IP box regime.

History IP Box Regime?

Ireland introduced for the very first time a scheme in its Corporation Tax on 1970s, more specifically, was section 34 of the 1973 Finance Act, that gave the first incentive to total tax relief to respect royalties and other income from licenses patented in Ireland, even though this scheme was withdrawn later on 2010 under the National recovery Plan 2011-2015 of the Republic of Ireland.

French Tax Authorities, decided to adopt Ireland’s example, on 2001 in reducing rate of tax of revenues gained from IP licensing or the transfer of qualified IP. Later IP box regime started being a financial “trend” for several European countries such as Belgium, France, Hungary, Luxembourg, Netherlands, Spain, United Kingdom, Switzerland and Cyprus.

Referring IP Box Regime all over the Europe, it can be divided in two big groups: first one provides for reduced rates of tax on qualifying income (this strategy is implemented by France, Netherlands and United Kingdom), while second group, provides for an exemption of a specified proportion of revenues (this is implemented by Spain, Luxembourg, Belgium, Hungary and Cyprus). The second group subdivides into schemes that exempt a proportion of gross and those that exempt a proportion of net revenues.

It is very convenient to deal with intellectual property due to its non-physical character. So it can be easily border-crossed between different jurisdictions and tax systems, according to pCyprevailing circumstances and developments in different countries.

Principle features of IP Box Regime in Cyprus

  • 80% exemption of qualified profit from exploitation of IP assets

Four-fifths (80%) of the profit earned from the use of intangible assets is deducted for tax purposes. So, only 20% of IP income after deduction of the costs of earning the income, is taken into calculation. Therefore applying to Cyprus corporate tax rate of 12.5%, which is among the lowest in the EU, provides the effective tax rate of 2.5%.

  • 0% tax on the gain from disposal of IP assets as a capital nature transactions

On 17 July 2020, the Cypriot House of Representatives approved a bill amending Section 9(1)(l) of the Income Tax Law which introduced a number of changes with respect to the tax treatment of intangible assets. Specifically, if disposal of intangible assets is a capital nature transaction then the resulting capital gain should not be taxable. The changes became effective from 1 January 2020 and the obligation to prepare a balancing statement upon a transfer or sale of an intangible asset is abolished.

  • Up to 20 years amortization period

Capital expenditure related to IP acquisition or development may be deducted in the first tax year in which the expense was incurred as well as in the subsequent years. That is, development or acquisition expenses are amortized over a period of up to 20 years. This in practice can lower the effective tax rate to less than 2%.

IP Box Regime Comparism Summary

  • Cyprus IP Box Regime provides a maximum tax rate of 2.5% on income earned from IP assets. The comparable rate in its nearest competitors, Belgium at 4.44%, Hungary at 4.5% and Luxembourg at 5.2%, is twice that amount, followed by Netherlands at 7%, France at 10% and United Kingdom at 10% who seem to be behind Netherlands but far behind Cyprus.Cyprus IP Box Regime applies to a wider range of income compared to other similar European scheme, most of which restrict benefits to income from patents and supplementary patent certificates.

    While IP Box Regime schemes of Belgium, Hungary, Luxembourg, Netherlands and United Kingdom offer partial exemption of gains on disposal, the exemptions become less attractive for IP holders than those offered by the Cyprus scheme, due to their limitations on qualifying assets and less deduction rates.

Ratification of all Major IP Treaties

Cyprus offers an efficient IP tax regime for tax optimisation, as well as maximum protection and certainty for IP owners due to the ratification of all major IP treaties and protocols.

Specifically, Cyprus is signatory to the below:

  • World Intellectual Property Organisation (WIPO) WIPO Performance and Phonograms Treaty
  • Madrid Agreement Concerning the International Registration of Marks (the Madrid Agreement) and Protocol to the Madrid Agreement
  • Patent Cooperation Treaty
  • Berne Convention for the Protection of Literary and Artistic Works
  • Paris Convention for the Protection of Industrial Property
  • Convention for the Protection of Producers of Phonograms Against Unauthorised Duplication of Their Phonograms
  • Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organisations

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