On 14 October 2016, the House of Representatives enacted into law amendments to the Income Tax Law (ITL) which were published in the Gazette on 27 October 2016 and provide for the gradual phase out of the current IP regime and the introduction of a new IP regime that is in line with the latest international developments on the taxation of IP income and OECD’s action plan on fighting base erosion and profit shifting (BEPS). The ITL amendments are supported by Regulations which provide detailed guidance in the calculations and application of the new IP regime.
Amendments to the current IP regime
The amendments include the introduction of grandfathering provisions to ensure that the current regime is phased out by 30 June 2021. IPs existing on 1 January 2016 and those developed or acquired from non-related persons between 2 January and 30 June 2016, will continue to benefit from the old IP regime until 30 June 2021. IPs acquired from related persons between 2 January 2016 – 30 June 2016 will be entitled to the benefits of the old regime only until 31 December 2016.
Introduction of a new IP regime
A new IP regime is introduced that defines the IP assets that qualify for the new IP regime (qualifying assets) and applies the “nexus approach” in calculating the amount of profits on which the 80% tax exemption is calculated (qualifying profits). Qualifying assets under the new regime is limited to patents, copyrighted software programs and other intangible assets that are non-obvious, useful and novel but do not include trademarks and copyrights.
Qualifying profits are calculated in accordance with the nexus fraction, where the higher the R&D expenditure incurred to develop the qualifying asset the higher the amount of profits qualifying for the 80% tax exemption.
Capital gains arising from the disposal of a qualifying asset are fully exempt from income tax. Eligible to benefit from the amendments are Cyprus tax resident persons, permanent establishments (PEs) of non-tax resident persons as well as foreign PEs which are subject to tax in Cyprus.
Other amendments relating to intangible assets
In addition to the above, amendments were voted into the ITL, introducing capital allowances for all intangible assets (excluding goodwill and assets qualifying for the existing IP regime). In accordance with these amendments, the capital costs of the assets will be tax deductible (as a capital allowance) and will be spread over the useful economic life of the asset, as determined by generally acceptable accounting principles (with a maximum useful life of 20 years).
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