Cyprus: Recent developments in Cypriot IP taxation: Are you prepared?

Christiana Nicolaou

If you already own an intellectual property (IP) box company in Cyprus, or if you are considering such a move, recent international developments at G20, OECD and EU level, along with the Cyprus Ministry of Finance's [MoF] December 30 2015 announcement, require your special attention.

As per this announcement, amendments to the current Cyprus IP tax regime will be promoted, so that a new IP tax regime is introduced as from July 1 2016. These changes will incorporate the recommendations of Action 5 of the OECD's BEPS Project, issued on October 5 2015, together with the conclusions of the ECOFIN Council adopted on December 8 2015. Further, the OECD's Action 5 report has been endorsed by the G20 and OECD countries. Additionally, it has also been endorsed by Council of the European Union which in December 2015 invited the EU's Code of Conduct Group [on Business Taxation] to follow the report's approach.

The MoF announcement states that it is the intention of the Cyprus authorities for the amendment of the IP legal framework to provide for the maximum transitional arrangements that are included in the revised framework.

In this way, it is expected that any IP that is benefitting from the Cyprus IP Tax Regime by the June 30 2016 will continue to benefit for another five years, that is, up to June 30 2021, in an effort to provide affected taxpayers a much-needed stability in the medium term.

We recommend and encourage all IP owners to consider that if any of their IP is not currently benefitting from the Cyprus IP box, and such IP qualifies and is eligible, that it is introduced to the current tax system by June 30 2016 at the latest. This will ensure that they can take full advantage of the transitional rules to June 30 2021.

Additionally, any IP that is acquired directly or indirectly from related parties, between January 1 2016 and June 30 2016, can only enjoy a transitional period to December 31 2016, unless that IP was already benefiting from an IP tax regime.

Furthermore the announcement includes and addresses the approach of Action 5, namely the 'modified nexus approach'. This requires the existence of material activity which includes the clear interconnection between the rights which create the income and the activity which contributes to that income.

In other words, the benefit needs to be linked to the amount of qualifying research and development (R&D) carried out by the claimant company. This is predicted to also bring new record-keeping routines as companies will need to 'track and trace' where R&D expenditure is spent, categorise per each individual patent, and will potentially also need to split their income in a similar manner to facilitate proof of the nexus approach being practiced.

Additionally, although the existing tax regime continues to be available to June 30 2021 for IP already in the regime at June 30 2016, mandatory information exchange is now required for any new entrants to regimes after February 6 2015.

Therefore, in line with BEPS Action 5 recommendations, Cyprus will be spontaneously exchanging information as per the existing international agreements, on entities which will be benefiting from the transitional arrangements if their IP entered into the current Cypriot IP box within the period February 7 2015 to June 30 2016.

As the above presented news is significant and could have an impact on your existing or planned structures, here at Eurofast our tax and finance advisors are ready to assist you towards undertaking a review of your IP relevant arrangements in order to assess and evaluate the impact of the change.

Further our advisors are supporting all affected taxpayers in maintaining their conformity in line with the newly released Cyprus Ministry of Finance announcement, assessing windows of opportunities both within the current and upcoming IP tax legislation frame, and pinpointing any need for necessary actions.

Moreover, our team recognises that tax complexity arises when companies are involved in international IP operations due to the multi-jurisdictional environment they function within. Nevertheless, when proper structuring is in place, such international functions can prove to provide even greater flexibility as a result! And when it comes to IP activity, being eligible to be levied with such favourable tax rates as those offered by Cyprus, this makes the Cyprus IP tax regime one of the most advantegous tax planning instruments.

Christiana Nicolaou (christiana.nicolaou@eurofast.eu)

Eurofast Taxand Cyprus

Tel: +357 22 699 222

Website: www.eurofast.eu