Intellectual Property (IP) Box alignment with the OECD’s BEPS Action 5 conclusions announced, with maximum transitional arrangements

The Cyprus Ministry of Finance (MoF) announced on December 30, 2015 that it will propose amendments to the current Cyprus intellectual property (IP) Box in order to introduce a new IP Box as from July 1, 2016 which will be fully aligned with the conclusions of the Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) Action 5 conclusions.

As Per the MoF announcement, Cyprus intends to provide from the maximum possible transitional arrangements. It is therefore expected that IP already benefitting from the current Cyprus IP Box by June 30, 2016 will continue to receive the current benefits for a further 5 years, i.e. until June 30, 2021. A much shorter transitional period to December 31, 2016, however, is expected in the case of IP which is acquired, directly or indirectly, from related parties at any time in the first six months of 2016, unless at the time of acquisition such IP was already benefitting from an IP Box.

The current Cyprus IP Box leads to a competitive effective corporate tax rate of 2.5% (or lower) for qualifying incomes earned on qualifying IP assets. Qualifying income currently includes royalties, gains on disposal of IP and IP infringement compensation. Qualifying assets are currently broadly defined and include, for example, copyrights (which may take any of the following forms: literary works, dramatic works, musical works, scientific works, artistic works, sound recordings, films, broadcasts, published editions, databases, publications, software programmes), patented inventions, trademarks (and service marks), as well as designs, and models that are used or applied on products. A narrower range of IP assets will qualify under the new IP Box as compared to the current IP Box, expected to include patents and computer software.

Although not referred to in the MoF announcement, it is expected that the planned new Cyprus IP Box will retain the benefit of the competitive effective corporate tax rate of 2.5% (or lower) but only a portion of income may qualify. The qualifying portion of the income is expected to reflect the 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.

In line with BEPS Action 5 recommendations it is expected that Cyprus will spontaneously exchange information (under existing international agreements) on taxpayers who benefit from the transitional arrangements of the current IP Box if the IP entered the current IP Box in the period February 7, 2015 to June 30, 2016.