Intellectual Property Regime Changes
On 30 December 2015 The Ministry of Finance (MoF) announced that it will promote amendments to the current Cyprus Intellectual Property (IP) tax regime that will be in full alignment with the OECD’s Base Erosion and Profits Shifting (BEPS) Action 5 report released in October 2015.
The new regime will be effective from 1 July 2016.
The MoF announcement states that maximum possible transitional arrangements are intended. We therefore expect that IP already benefitting from the current Cyprus IP tax regime by 30 June 2016 will continue to receive the current benefits for a further 5 years, i.e. until 30 June 2021.
It is likely that IP which is acquired from related parties at any time in the first six months of 2016, will only benefit under the old regime only to 31 December 2016 unless at the time of acquisition such IP was already benefitting from an IP tax regime. Under the new IP tax regime a narrower range of IP assets will qualify as compared to the current IP tax regime. Patents and computer software will benefit, but the situation is not clear regarding most forms of copyrighted IP (music, literary works, databases etc.)
The current Cyprus IP tax regime leads to a competitive effective corporate tax rate of 2,5% for qualifying incomes earned on a broad range of qualifying IP assets. This beneficial rate is expected to continue for qualifying assets under the new regime, but the nexus approach referred to in the announcement suggests that the qualifying income will reflect the proportion of research and development (R&D) expenditure undertaken by the IP owner itself (or outsourced to unrelated parties) as compared to the total R&D expenditure required to develop the asset.
Taxpayers should consider whether there is eligible IP not currently benefitting from the current Cyprus IP tax regime which they wish to introduce to the current IP tax regime by 30 June 2016 in order to take advantage of the transitional rules until 30 June 2021.
Important note: This article has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice from a qualified accountant.