https://home.kpmg.com/cy/en/home/insights/2016/10/amendments-to-the-cyprus-intellectual-property-regime.html
Qualifying IP assets
The changes restrict qualifying IP assets to patents, computer software, as well as IP assets which are non-obvious, useful and novel and from which the income of a taxpayer does not exceed, in a 5 year period, €7.500.000 per annum (€50.000.000 for taxpayers forming part of a Group).
Further, qualifying IP assets under the modified nexus approach do not cover trademarks including brands, image rights and other intellectual property rights used for the marketing of products or services.
The modified nexus approach
According to the “modified nexus approach”, there should be sufficient substance and an essential nexus between the expenses, the IP assets and the related IP income in order to benefit from a patent box regime. Under the nexus approach, the application of an IP regime should be dependent on the level of Research and Development (R&D) activities carried out by the qualified taxpayer.
The following formula has been introduced to determine the qualifying profits that can benefit from an IP regime under BEPS:
[(Qualifying expenditure + Up-lift expenditure)/Total expenditure] x Overall IP Income
Qualifying expenditure, excludes the R&D costs of outsourcing to related parties, contrary to the cost of outsourcing to unrelated parties which are considered as part of ‘qualifying expenditure”. In addition, the amendments provide for a maximum 30% up-lift of “qualifying expenditure”, thus allowing qualified taxpayers to include all or part of non-qualifying R&D costs to be included as part of the “qualifying expenditure”.
Foreign Permanent Establishments (PEs)
Under the modified nexus regime, foreign PEs of Cyprus tax resident companies engaged in R&D activities give rise to “qualified expenditure” provided that they make an election so that their profits are taxed in Cyprus. It should be noted that such an election is irrevocable. In the instance where the profits of the foreign PEs are taxed abroad, a unilateral tax credit relief will be afforded
in Cyprus, up to the amount of the tax payable in Cyprus on such profits.
Tracking of income and expenditures
Taxpayers are required to maintain books and records in relation to income and expenditure per qualifying asset so as to track expenditure and income to ensure that the income receiving benefits did, in fact, arise from the qualifying expenditure incurred.
