Nicosia, June 2012
In May 2012, the House of Representatives ratified new amendments to the Income Tax Law. These changes are particularly important for companies whose main business is to hold Intellectual Property Rights (“I.P. Rights”). With this amendment, a specific tax regime has been created for such companies which own I.P. Rights, and who generate royalties from these.
These amendments have retrospective effect from the 1st January 2012.
The definition of I.P. Rights has been amended to reflect the definition as that is set out in the relevant trade mark laws of Cyprus.
The new tax regime provides for favorable tax treatment in relation to income generated from any type of I.P. Rights as well as providing for respectable capital allowances for acquisition and further development of such rights.
In light of the new amendment, 80% of profits generated as royalties from such I.P. Rights will be exempt from corporation tax. The remaining 20% will be subject to the normal corporation tax rate of 12.5%.
To calculate the profit generated from royalties, we deduct from the total of the income derived from I.P. Rights all expenses incurred wholly and exclusively for the production of the I.P. Rights income.
The new tax treatment also encompasses the profit from any future sales of the I.P. Rights. This means that the registered owners of the I.P. Rights not only enjoy tax benefits on the income generated from the use of such rights but also provides for a tax efficient in the future transfer of the I.P. Rights.
Furthermore, the company which owns the I.P. Rights will be able to write off the capital expenditure made on the acquisition or development of such rights in the first five years of use. The company will be able to receive capital allowances of 20% from the first year of the use of the asset as well as the subsequent four years of usage.
If we compare the old regime of taxation for I.P. Rights which essentially taxed all profits generated derived from I.P. Rights at the standard corporation tax rate of 12.5%, we immediately see that the new amendment exempts a large chunk of these profits from taxation. Essentially, the profits derived from I.P. Rights are 20% at a rate of 12.5% means that the effective tax rate for I.P. Rights derived profit is 2.5%.
This makes the Cyprus company extremely beneficial for owners of I.P.Rights, whose main business activities is to derive royalty income from these rights.