Companies owning any type of intangible assets, such as patents, intellectual property rights and trademarks are often in need of an IP Holding vehicle through which they will hold these assets, license them for the generation of royalty income and conduct their business activities.
Choosing the jurisdiction of such an IP Holding vehicle requires careful consideration to ensure that there will be adequate asset protection, tax optimisation and flexibility in the legal framework that this vehicle will operate in.
With the introduction of the new Cyprus tax legislation on Royalties in May 2012, Cyprus has become a major player in the field of IP Holding Companies.
In this brochure we shall examine the main features of the Cyprus tax regime to identify the importance of the Cyprus IP Holding Company and highlight the benefits it can offer to the international investor.
B. THE CYPRUS IP HOLDING COMPANY – TAX FEATURES
The new tax regime provides for favourable tax treatment in relation to income generated from any type of qualifying intellectual property rights, patents and trademarks as well as providing for generous capital allowances for acquisition and development of such rights. For simplicity we will refer to them below with the general term of “IP Rights”.
1. Tax Treatment of Royalty Profits
According to the new regime, 80% of “Royalty Profit” generated from Qualifying IP Rights will be considered as a deemed expense for corporation tax purposes. The remaining 20% will be subject to the normal corporation tax rate of 12.5%. What is considered as a “Qualifying IP Right” will be examined in more details in Section C.1. below.
For the purpose of determining the “Royalty Profit” the law allows the deduction from the resulting royalty income of all expenses incurred wholly and exclusively for the production of royalty income.
2. Tax treatment of Profits from Sale of a Qualifying IP Right
According to the new legislation, the possible profits generated from a future sale of a Qualifying IP Right will also enjoy the above favourable tax treatment. In effect 80% of the profit from the sale of the Qualifying IP Right will be considered as a deemed expense and only the remaining 20% will be subject to the normal corporation tax rate.
This provision is of significant importance as it provides to the owners of the IP Rights a tax efficient exit route for the future.
3. Acquisition/Development Capital Allowances
In addition to the above, the Cyprus IP Holding Company will be able to write off the capital expenditure made on the acquisition or development of such Qualifying IP Rights in the first five years of use. The company will be able to receive capital allowances of 20% straight line, starting from the first year of the use of the asset, as well as the subsequent four years of usage. These capital allowances are considered of course, tax deductible, which makes the tax benefits of the first five years even more attractive.
In effect, the tax rate applicable on the Cyprus IP Holding Company can be lower than the maximum effective rate of 2.5% as it can be further reduced by the deduction of the above capital allowances.
C. THE CYPRUS IP HOLDING COMPANY – CONDITIONS
In order for a Cyprus IP Holding Company to benefit from the above favourable tax regime it must satisfy certain conditions. These conditions are analysed in more detail below:
1. Qualifying IP Right
According to the Tax legislation, any intangible asset that is protected by the following laws of Cyprus will be considered as a Qualifying IP Right for the purposes of the favourable tax regime:
a. Patent Law
Patents and Innovations are protected:
In Cyprus through the Patent’s office of the Department of the Registrar of companies and Official Receiver which is the responsible body to examine an application and to issue national patent certificates.
At European Level, pursuant to the European Patent Certificate issued by the European Patent Office.
Internationally, by the International Patent Certificate issued by the World Intellectual Property Organisation (WIPO) under the provisions of the Patent Cooperation Treaty of which Cyprus is a signatory.
b. Trademark Law
Similarly with Patents, the three aforementioned ways of protection are available and recognised in Cyprus when it comes to trademarks:
Protection of a Trademark at National level is achieved by registration with the Trademarks’ office of the Department of the Registrar of Companies and Official Receiver, under the provisions of Trademarks Law Cap. 268.
Protection of a Trademark at European level is achieved by virtue of the EU Regulation 207/2009 of 26/02/2009 on the Community Trademark and EU Regulation 6/2002 of 12/12/2001 on the Community Design registration.
Protection at International level is achieved through the Paris Treaty on the Protocol of Industrial Property as administered by WIPO and by the Madrid Protocol which affords global protection of trademarks, service marks and designs.
c. Intellectual Property Law
Copyright is a recognised and protected intellectual property right, even though there is no system of copyright registration in Cyprus as copyright vests in works automatically.
Protection of Copyrights at National level is achieved by the Intellectual Property Law N.59/1976 (IP Law), according to which following works of intellectual property are protected by copyright:
Literary works, including computer programmes;
Artistic works, including photographs of any type;
Publications of previously unpublished works.
At international level, Cyprus is a signatory of the Bern Convention of 1886 (Literary and Artistic Works) as well as the Rome Convention (Performance, Production and Broadcasting). Both Conventions have been transposed into the Cyprus legislation. It follows that, copyright in works which is protected by the said international treaties is automatically recognised and protected in Cyprus.
2. Ownership of the Qualifying IP Rights
In order for a Cyprus IP Holding Company to qualify under the scheme it must be the owner of the Qualifying IP Right. The ownership might come through acquisition of an existing IP Right or through the internal development of the IP Right.
It is worth mentioning that the acquisition of an already existing IP right can be done not only with cash but it can also be acquired as a contribution in exchange of shares. For example a Cyprus company can increase its share capital and allot the new shares to the owner of the IP right. The owner of the IP right will contribute the IP Right as a full settlement for the shares allotted, avoiding therefore any cash outflow for the group.
In such situations, it is suggested that a valuation of the Qualifying IP Right is obtained from a qualified valuer, in order to be able to justify, when and if required, the amount of capital allowances calculated on the value of the IP Right as explained in Section B.3 above.
3. Use of the Qualifying IP Right
The Cyprus IP Holding Company should use the Qualifying IP Right for the production of taxable income. This means that the IP Right should be licensed to other parties in exchange for royalty income.