Why Cyprus?

In May 2012 the Cyprus Government has introduced growth measures which amongst others included a package of incentives and tax exemptions relating to income from intellectual property rights, aimed at stimulating investment in research and development. Therefore now Cyprus offers an efficient IP tax regime coupled with the protection afforded by EU Member States and by the signatories of all major IP treaties and protocols.

There has been considerable opposition from some countries to IP box regimes and, under the G20/ Organisation for Economic Co-operation and Development (OECD) base erosion and profit-shifting project, new entries to such schemes will not be permitted after mid-2016. However, companies that join the Cyprus scheme before that date can benefit from substantial savings until mid-2021.
Registrable IP does not need to be registered in Cyprus to benefit from IP regime in Cyprus.

The main features of the new Cyprus IP box are as follows:

Tax benefits

The new provisions provide exemptions from tax of the income related to IP. More specifically:

  • 80% of worldwide royalty income generated from IP owned by Cypriot resident companies (net of any direct expenses*) is exempt from income tax.
  • 80% of profit generated from the disposal of IP owned by Cypriot resident companies (net of any direct expenses*) is exempt from income tax.
  • any expenditure of a capital nature for the acquisition or development of IP is claimed as a tax deduction in the year in which it was incurred and the immediate four following years on a straight-line.
  • All the above exemptions are also available for IP acquired or developed before January 2012

Overall an effective tax rate of 2.5% the lowest in the EU 2012 is applied. The amount subject to tax under the new rules is calculated by deducting the writing down allowance, the costs (including interest) of financing the acquisition or development of the assets and any other direct expenses from the revenue earned, and dividing the resultant amount by five. Applying the Cyprus corporate income tax rate of 12.5% produces an effective tax rate of 2,5% of the net income.

Comparison with European regimes

Cyprus’s IP box regime provides for a maximum tax rate of 2.5% on income earned from IP assets. The comparable rate in its nearest competitor, the Netherlands, is twice that amount, at 5%. Luxembourg (5.76%) and Belgium (6.8%) follow close behind the Netherlands, but far behind Cyprus.

The Cyprus IP box regime applies to a wider range of income than any other European scheme, most of which restrict benefits to income from patents and supplementary patent certificates:

  • There is no cap on benefits, such as applies in Belgium, Hungary and Spain;
  • There is no requirement regarding self-development of the intellectual property; and
  • There are no restrictions on where expenditure on the acquisition or development of intellectual property is incurred.

While the French, Hungarian, Luxembourg, Netherlands and UK schemes offer a partial exemption for gains on disposal, the exemptions are less attractive than those provided by the Cyprus scheme, due to limitations on qualifying assets and less generous deduction rates. Further, full exemption can be relatively easily obtained in Cyprus by holding the IP assets in a separate company and disposing of the shares in the company rather than the intellectual property itself, thus taking advantage of Cyprus’s extensive capital gains tax exemptions.

Following the introduction of the IP box, considerable savings can be achieved by locating the IP owner in Cyprus and having it license the use of the rights direct to the end users, eliminating (or at least reducing) foreign withholding taxes via a double tax agreement or the EU Interest and Royalties directive, which provides a uniform tax regime for royalties paid throughout Europe.

The new rules will also enhance the degree of legal and jurisdictional protection, given that the legal and corporate governance affairs of the IP structure will be governed by the laws of Cyprus, so ensuring an increased level of legal certainty, asset protection and predictability.

Cyprus’ wide double tax treaty network and access to the EU Interest and Royalty Directive serve as additional means for the group to achieve tax optimization when it comes to IP exploitation through Cyprus.


The acquisition of intellectual property rights from anywhere in the world by a Cyprus company is treated as a service rendered to the company which will create an obligation for it to register for VAT and to account for VAT on services received in accordance with the reverse charge rule. No registration obligation will be created if the intellectual property right is developed organically rather than being purchased.

If the company charges royalty fees to taxable persons within the European Union area it will also have to register for VIES.

PAHALAW can assist you with:

  • Set up Cyprus IP holding structure
  • Advise on Corporate Statutory Compliance matters
  • Advise on Existing IP – Transfer to Cyprus
  • Ongoing Support after initial set-up

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