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28 August 2012

Part 2 : Introduction of Intellectual Property Regime for Cypriot Companies

The changes to the Law for Intellectual Property Assets brought many advantages for International Businesses.

We demonstrate the effect of capital allowances at the rate of 20% to be granted on any capital expenditure incurred for the purchase or development (cost of acquisition or cost of development) of intangible assets or intellectual property rights.

The allowances apply after on expenditure after 1 January 2012 and will be available in the tax year the costs incurred and for four subsequent tax years.

 

Example:

A company residing in the Republic of Cyprus (Company A) is the owner of the intellectual property and acting as a licensor, provides the right for the use of the intellectual property, to another Cyprus company (Company B). Company B using the above intellectual property will be providing the applicable services to various end users, who are not Cyprus tax resident.

The tax treatment of the transactions carried out and the income earned by the participant companies of the structure, will be as follows:

Company A will be subject to taxation in Cyprus at a rate of 10%, on 20% of the gain arising from the licensing of the intellectual property hence being subject to a maximum effective tax of only 2%

Company B will be subject to taxation in Cyprus at the rate of 10% on its trading income received in respect of the services it provides outside Cyprus (as a result of the use of the intellectual property) less the royalties paid to Company A and any other attributable expenses.

In this respect Company B will be able to reduce its taxable income by the royalty payments to Company B as this will be treated as a fully tax deductible expense.

Upon disposal of the intellectual property Company A will again be able to claim the 80% exemption and in this respect it will only be taxed on 20% of the gain arising from the disposal.

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