If you already own an IP box company in Cyprus, or if engaging to one is of your interest, recent international developments at G20 / OECD / EU level, and the Cyprus Ministry of Finance (MoF) December 30th, 2015 announcement, requires your special attention.
As per this announcement, amendments to the current Cyprus Intellectual Property tax regime will be promoted, so that a new IP tax regime is introduced as of July 1st, 2016. These changes will incorporate the recommendations of Action 5 of the Organisation for Economic Co-operation and Development (OECD), which were issued on October 5th, 2015 for the Action Plan against ‘Base Erosion and Profit Shifting’ (BEPS), together with the Conclusions of the ECOFIN Council adopted on December 8th, 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 (Business Taxation) to follow the report’s approach.
Transition to the new regime and applicable time – frames
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 June 30th, 2016, will continue to benefit for another 5 years, i.e. up to June 30th, 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 30th, 2016 at the latest. This will ensure that they will take full advantage of the transitional rules to June 30th, 2021.
Additionally, any IP that is acquired directly or indirectly from related parties, between January 1st, 2016 and June 30th, 2016, can only enjoy a transitional period until December 31st, 2016, unless that IP was already benefiting from an IP tax regime.
The Nexus Approach
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.
Exchange of Information
Additionally, although the existing tax regime continues to be available until June 30th, 2021 for IP already in the regime at June 30th, 2016, mandatory information exchange is now required for any new entrants to regimes after February 6th, 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 from February 7th, 2015 to June 30th, 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.
Furthermore 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 pin-pointing 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 favorable tax rates as the ones Cyprus offers, this makes the Cyprus jurisdiction Intellectual Property tax regime one of the most advantageous tax planning instruments.