Royalty Company & Intellectual Property Structures
The legislation provides for an 80% exemption on royalty income (net of any direct expenses) arising from the exploitation of IP by a Cyprus company. The remaining 20% will be subject to the corporation tax rate of 12.5%, resulting in an effective tax rate of 2.5% or lower. For the determination of net income from royalties, the law allows for deduction of expenditure incurred wholly and exclusively for the development or acquisition of the Intellectual Property (IP).
Practical Example
- Taxation of royalty income
A Cyprus tax resident company owns IP in the form of computer software which it licences to different countries and receives royalty income amounting to 1,200,000 after deducting directly related expenses of 500,000. In accordance with the new IP provisions such royalty income will be taxed as follows:
Net income from royalties |
1,700,000-500,000
|
€ 1,200,000
|
|
80% exemption
|
(1,200,000 * 80%)
|
-€ 960,000
|
|
Taxable Income
|
|
€ 240,000
|
|
Tax Liability
|
240,000 @ 12.5%
|
€ 30,000
|
|
Effective tax rate
|
|
2.5%
|
- Intellectual Property (IP)
Gains from the disposal of IP
A Cyprus IP holding company will also benefit from the 80% exemption provisions in regards to gains (after deducting direct expense) arising from the disposal of the IP.
5 Year amortization period
Capital Expenditure related to Intellectual Property acquisition or development may be deducted in the first year in which the expense was incurred as well as in the subsequent four years, i.e. development or acquisition expenses are amortized over a period of 5 years. This in practice lowers the effective tax rate to less than 3%
Conditions
- No conditions, either in the form of a limited definition of IP, related party acquisitions and/or a minimum holding period are attached to the above advantageous tax regime.
Practical Example
- Taxation of gains from the disposal of IP
A Cyprus tax resident company disposes of a patent for €5,000,000. The development of the patent had cost €1,500,000 and amortization was claimed for 3 years. In accordance with the new IP provisions the proceeds from the disposal of the patent will be taxed as follows:
Sales Proceeds
€ 5,000,000
Less: Costs of acquision
-€ 1,500,000
€ 3,500,000
Add back: Amortization claimed
€ 900.00
€ 4,400,000
80% exemption
(4,400,000 × 80%)
-€ 3,520,000
Taxable income
€ 880,000
Tax Liability
880,000@12.5
€ 110,000
Effective Tax Rate:
2.2%
