What is an IP Box, and how do I get the 2,5% super privilege?

Cyprus, as the European country with the lowest taxes, offers entrepreneurs a tax rate of 12,5%. However, if certain conditions are met, getting a super-privileged tax regime IP Box is possible, under which the rate can be reduced to 2,5%. What is an IP Box, and who can get such low taxes?

The goal of every business is to optimize taxation and thereby increase competitiveness. Taxes in most countries are pretty high. To combat evasion, many developed countries have implemented an action plan against tax avoidance. So today, instead of the question «how not to pay taxes», businesses are faced with the question «how to pay taxes more profitably». But when it comes to the super privileged IP Box program, that «how» turns into «where», and the answer is in Cyprus, the European country with the lowest taxes for businesses.

IP Box — what is it?

IP Box is a preferential tax regime for profits from innovation and investment in intellectual property. The name comes from the abbreviation for Intellectual Property Box. The program can also be called Patent Box and Knowledge Development Box. This tax regime greatly benefits IT businesses and companies that develop technologies and spend much on Research and Development (R& D).

Assets under the IP Box exemption are qualifying assets — e.g., inventions, software, and pharmaceuticals.

Which countries have an IP Box tax regime?

Ireland was the first country to launch the IP Box program. Then France, Hungary, the Netherlands, Luxembourg, and other countries joined it.

Gradually there were 2 main types of IP Boxes:

• reduced tax rate on profits from qualifying assets — Poland, France, Netherlands, UK;
• 0% rate for a portion of profits from qualifying purchases — Cyprus, Malta, Luxembourg, Ireland.

The rates and conditions of the IP Box tax regime may vary from country to country. Here is a brief overview of the rates and conditions in some of the countries:

• Netherlands:
• Intellectual property tax rate: 7% (starting from 2021).
• The IP Box regime is available for a wide range of intellectual property, including patents, copyrights, software, etc.
• Specific criteria are required, including qualified personnel and active intellectual property management.
• Luxembourg:
• Intellectual property tax rate: 5,76% (starting in 2021).
• IP Box covers patents, copyrights, trademarks, commercial ideas, etc.
• Qualified research and development (R& D) expenses are required.
• Belgium:
• Intellectual property tax rate: 15,8% (starting in 2021).
• IP Box covers patents, copyrights, software, etc.
• It is necessary to obtain an «IP Box certificate» and meet the requirements related to research and development.
• Ireland:
• Intellectual property tax rate: 2,5% (starting in 2021).
• IP Box covers patents, copyrights, know-how, design, etc.
• Specific criteria must be met, including qualified research and development expenses.

Cyprus also has an IP Box tax regime known as the «Intellectual Property Income Tax Regime» (IP Regime). Here are some primary conditions and rates applicable to IP Box in Cyprus:

• The general tax rate on income from intellectual property: 2,5%.
• The regime covers various intellectual property, including patents, copyrights, know-how, etc.
• To qualify for IP Box, intellectual property must be registered in Cyprus or acquired as a result of research and development activities.
• Companies participating in the IP box must have a substantial research and development (R& D) presence in Cyprus.
• Profits derived from intellectual property may be exempted from taxation at 80% (the so-called «tax deduction»).
• In the case of an intellectual property sale or transfer, the income may be taxable at 20%.

However, it is essential to note that tax laws can change over time, and the rates and terms of IP Box in Cyprus may be subject to change.

What is the tax rate in Cyprus?

The IP Box regime in Cyprus has been in effect since 2012, updated in 2016. Under the new rules, 80% of profits from qualifying assets are not taxable. The remaining 20% is taxed at the rate of 12,5%. That is, the tax on total profits may be only 2,5%.

To which assets does the IP Box apply in Cyprus?

To pay the lowest taxes in Cyprus (from 2,5%), you must produce specific intellectual property, called qualifying assets.

Only objects of innovative activities of the company fall under the preferential regime — you must produce a unique technological product, the profits from which will be subject to a super-privileged tax rate. By introducing such a regime, Cyprus retains its status as a solid jurisdiction while not losing its attractiveness for investments from international companies. In this way, the country reinforces its commitment to innovative development.

Qualifying assets subject to the IP Box regime include:

• patents for inventions, industrial designs and utility models;
• software, mobile applications, and computer programs;
• utility models and intellectual property related to plants, genetic materials, and orphan drugs (drugs for the treatment of rare diseases);
• know-how is knowledge, skills, experience, confidential information that can be commercially advantageous, and other intellectual property that is «non-obvious, useful, and new».

Qualifying assets are not considered qualifying assets:

• trade names;
• trademarks;
• images;
• other intellectual property used for marketing purposes.

Who can use the IP Box regime:

• companies that are tax residents of Cyprus;
• permanent establishments of foreign companies that pay taxes in Cyprus.

The preferential tax regime of Cyprus IP Box applies not to the company’s profits as a whole but separately to each piece of intellectual property.

The advantage of IP assets is the absence of physical attachment to the location. Intellectual property is convenient by its intangible nature. Any such object can be easily moved between different jurisdictions and work on it from anywhere in the world.

Today, more than 2 thousand IT companies do business in Cyprus to optimize taxation while performing the primary operations on the product abroad.

Important features of the IP Box

Preferential treatment can be used only if the qualifying asset is created or finalized in Cyprus.

A scheme in which a Cypriot company exists only on paper, but the qualifying asset is transferred to it already in finished form, will not work.

Consider the situation: a foreign company has developed an antivirus, registered a company in Cyprus, and transferred the ready-made program to it to reduce income tax. In this case, the preferential tax regime does not apply because the software is not created and not finalized by the Cypriot company.

Tax rate formula: how to calculate taxation by IP Box

To calculate the tax rate in IP Box mode, qualifying income is calculated. Of it, 80% are not taxed, and the remaining 20% are taxed at 12,5%. That is, the rate of profit varies from 12,5% to 2,5% and depends on the cost of developing the object of intellectual property. The more a company spends on R& D (excluding the services of affiliated companies), the lower the tax.

Calculation of the rate by example

For example, a Cypriot company developed a new game in the royal battle genre. Spent 500 000 € on it, made a profit of 1 million € and wants to reduce the tax as much as possible.

Option 1: make the game themselves, finalized on the side.

The company created the game, paid 300,000 € to full-time employees, and spent 200,000 € on third-party services from India, a total expense of 500,000. €

In this case, the tax can be reduced as much as possible — the company created the game, and outsourcing was to third-party companies, so all profits are considered qualifying.

Total: profit 1,000,000, € tax of 25,000, € the effective tax rate of 2,5%.

Option 2: bought the game and finalized on the side.

The company bought the game for 300,000 € and spent 200,000 € on third-party services from India, a total expense of 500,000. €

Here the tax will not be reduced by the maximum — outsourcing was to third-party companies, but the company did not develop but bought the game, which reduces the qualifying income.

Total: profit 1,000,000, € tax 73,000, € effective tax rate 7,3%.

Option 3: bought and finalized through a related company.

The company bought the game for 300,000 € and spent 200,000 € on the services of developers from an affiliated Russian company. The total is 500,000. €

Here you can not reduce the tax — the Cypriot company did nothing. The game was bought and finalized by the affiliated company.

Total: profit 1,000,000, € tax of 125,000, € an effective tax rate of 12,5%.

IP Box: profitable or unprofitable?

Examples show how to reduce the tax rate down to 2,5%.

Maximum benefit: the company creates the product with the help of in-house employees or third-party developers or buys and seriously finalizes it.

Minimal benefit: we buy a finished product, don’t finalize it, or finalize it through related companies.

In general, IP Box in Cyprus offers several of advantages, some of which are:

• The low tax rate on intellectual property income is only 2,5% on 100% of income derived from qualifying assets.
• Exemption from taxation of up to 80% of income from intellectual property allows companies to reduce their tax burden significantly.
• Simplified procedure for the administration of tax liabilities, which may include a more straightforward accounting system and reporting income from intellectual property.
• Cyprus has a solid system of legal protection of intellectual property, contributing to the protection and attraction of investments in innovative and technological projects.
• Developed infrastructure, including technology parks, incubators, and research centers, promotes innovation and intellectual property development.
• Cyprus has broad international recognition and attractiveness for business. It is a member of the European Union, which provides access to the EU internal market and its benefits. Favorable tax legislation and high financial stability make Cyprus one of the leading international financial centers.

How to choose a jurisdiction with an IP Box to start an IT company?

When choosing an IP Box jurisdiction to start an IT company, several factors must be considered.

One of the critical criteria for choosing a jurisdiction is the tax advantages offered by the IP Box. Research the intellectual property tax rates, tax exemptions, and other tax benefits available in each jurisdiction. Pay attention to the country’s general tax regime and the availability of other tax benefits for companies in the IT sector.

Also, research the level of intellectual property protection in the chosen jurisdiction. Determine how solid and effective copyrights, patent laws, trademark rights, and other forms of intellectual property are in that country. Your IT company will need a reliable intellectual property rights protection system.

Assess the level of IT infrastructure development in the jurisdiction. This may include technology parks, incubators, research centers, and other innovation clusters. A well-developed IT infrastructure and an ecosystem that supports technology development can stimulate your company’s growth and provide access to specialists and partners.

И, конечно, рассмотрите доступность выбранной юрисдикции к целевым рынкам и клиентам. Учтите географическое положение, торговые соглашения, присутствие международных компаний и бизнес-возможности в данной стране. Это может повлиять на вашу способность привлекать клиентов, вести международные сделки и расширять свою деятельность

Advantages of different jurisdictions for starting a company under the «patent box» program

Cyprus stands for stability, reliability, and a highly qualified workforce. A favorable business climate and a welcoming regulatory environment promote the development of companies in the IT sector, as well as many agreements on avoiding double taxation.

Luxembourg invests in innovative infrastructure development, such as research centers and incubators, which contributes to the development of the IT sector.

The Netherlands has a well-developed infrastructure, including advanced technology parks and innovation clusters. It provides access to highly qualified specialists, investment, and international markets.

Malta is strategically located in the heart of the Mediterranean and provides access to European, African, and Middle Eastern markets. It facilitates international trade and offers a wide range of opportunities for business expansion. It also has an innovation ecosystem and actively invests in developing innovation clusters, technology parks, and research centers.

Ireland is known for its technological expertise and innovative environment. The country has large technology companies and a highly skilled IT staff, which provides access to talent and opportunities for collaboration and business development.

Belgium has an active and diverse startup ecosystem supported by incubators, gas pedals, and venture funds. This creates a favorable environment for startups in the IT sector, providing access to funding, expertise, and networks of contacts.

Poland offers companies several tax benefits and incentives, including tax credits and economic activity zones. It also actively develops the technology sector and innovation, investing significant resources in research and development. The country has modern technology parks and incubators and access to qualified IT staff.

France has a large domestic market and access to European markets. This provides opportunities to expand the business and attract customers from different industries and sectors. It has a well-developed infrastructure, including high-speed Internet networks and technology parks. It also actively supports innovative projects and research, providing access to grants, funding, and support programs.

The UK is a financial center and has access to investment. London is one of the world’s leading financial centers, providing IT companies with access to investment and financing. The UK also has a rich innovation environment with a large and diverse pool of highly skilled IT professionals.

Why choose Cyprus for business investments?

There are tax benefits for technology companies in different countries, but in Cyprus, taxation is highly favorable.

Benefits of the IP Box regime in Cyprus:

1. It fully complies with the recommendations of the European Union and the Organization for Economic Cooperation and Development.
2. Low tax rate even without benefits — 12,5%.
3. Possibility to reduce the tax to 2,5%.
4. Outsourcing R& D to third-party companies outside Cyprus is possible — this also counts as a qualifying expense.
5. You can provide a scheme of the company’s work to the tax office in advance and get a Tax Ruling — the document determines whether the preferential treatment applies to the business.
6. Cyprus is a member of the European Union and a party to intellectual property conventions.
7. Cyprus has double taxation treaties with 67 countries, including Russia and Ukraine.

Also, read about how to become a tax resident of Cyprus and save in the country with the lowest taxes. The island’s tax system is among the most favorable in the European Union regarding rates, benefits, and opportunities to obtain tax residency status. Our material explains how to get tax residency status and the benefits you will receive.

And we are pleased to offer you the top 10 residential real estate in Cyprus for a temporary permanent residence. You can see the apartments, compare prices and choose what suits you best.

SPM is your most valuable contact in Cyprus.

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