The IP Box is a very low corporate tax regime that enables international companies specializing in the development of patents, software, and technical solutions (e.g. utility models, trademarks and design) to significantly reduce their tax burden. The IP Box regime is applied by various countries in relation to the profits derived from the use of certain IP objects.
First introduced in Ireland in the 1970s, the IP Box regime was later applied by other European states. Today, different Ip Box regimes exist in Liechtenstein, Great Britain and other EU countries. Previously, the IP-Box regime was aimed at supporting and developing the innovative sphere; nowadays, it is an important tax planning tool that enables R&D and IT companies to transfer their intangible assets to jurisdictions with business-friendly tax regimes.
IP Box SchemesNow that we have established what the IP Box regime is and where it is applied, we can proceed to discuss its main features. According to the OECD decision, the Patent Box regime is divided into 2 main groups, each of which includes several European countries.
The first group includes:
- IP Box in England;
- Patent Box in Belgium;
- IP Box in the Netherlands.
What makes this group different from others is the stricter rules of preferential treatment. For example, in Belgium and the Netherlands, this regime does not apply to IP objects that were not developed by tax paying companies, but only acquired by them. In its turn, the second group of countries with more investor-friendly tax regimes include:
- Patent Box in Malta;
- IP Box in Hungary;
- IP Box in Portugal, Liechtenstein and France.
Due to covering a large portion of intangible assets, the IP-Box regime in Ireland and the above countries provides one with a number of benefits arising from the purchase of IP objects.
Cyprus: Application of the IP-Box RegimeThe Patent Box concept can be taken quite literally - as a “patent box” containing a list of IP objects subject to preferential taxation as per existing laws. They include:
- utility models;
- production secrets (know-how);
- copyrights, etc.
The following “formula” can be used to illustrate the attractiveness of the IP Box regime: a large list of IP objects + low effective tax rate on income derived from these objects = a promising jurisdiction for the creation and development of IT and R&D companies.
It should be noted that the IP Box regime is triggered only in the process of deriving income from IP objects included in the “patent box”. For the regime to function properly, only a certain part of the profit received from IP objects should be taxed.
Also, IT business owners or individuals wishing to register an IT company (R&D company) should keep in mind that each jurisdiction has its own IP Box regime characterized by a different set of IP objects and effective tax rate.
For example, under the IP Box regime in Luxembourg, 80% of profits derived from TM, software, patents and domain names created/bought by taxpayers are exempted from taxation.
The “patent box” in Luxembourg includes:
- copyright (exclusively for software);
- patents for inventions;
- utility models.
This IP Box regime does not apply to:
- claims of inventions;
- production secrets;
- copyright for inventions, scientific works and databases (except for software development and IT programs).
There are also jurisdictions that do not have any restrictions on the preferential tax treatment with respect to intangible assets. The main jurisdictions that have this special preferential treatment are:
- Republic of Cyprus
TM Registration in Cyprus and IP Box TypesThe best option for those planning to open an IT company or register a TM would be the Patent Box regime in Cyprus. Under this regime, taxes for the use of IP objects are paid at a reduced rate. There are 2 types of IP Box Regimes in Cyprus - old and new.
The old regime, which will be in place until June 30, 2021, has the following advantages:
- preferential tax regime is applied to profits derived from using any intangible assets;
- Cyprus-registered companies can directly participate in IP development;
- no corporate tax is paid on eighty percent of profits derived from selling IP objects;
- deductible expenses are calculated at a rate of twenty percent per annum.
Gaining eligibility for the new regime requires obtaining a permit from the Cyprus Tax Administration & keeping records of all income & expenditure related to intangible assets. The main advantages of the New Regime is that eighty percent of qualified income derived from qualified assets (i.e. software, patents & other IP assets) is exempt from taxes. The above assets must be developed only in the Republic of Cyprus & solely for the purpose of doing business in this country; they can also be borrowed/acquired from 3rd parties which aren't related to Cyprus-based companies.
The new regime applies a special “nexus” approach to determine qualified profits. A special formula has been developed whereby the money & effort expended on testing, developing & perfecting IP objects is used for calculating profits.
YB Case: Assistance with Using the IP Box Regime
If you have any questions regarding the new IP Box regime in Cyprus, please do not hesitate to contact YB Case. Our experts will also be happy to provide you with advice on registering an IT business in any of the above jurisdictions. To sign up for a consultation on the IP Box regime in Cyprus, please use the form below.