To fight against tax evasion developed countries have implemented an action plan against hiding profits from taxation. Now, instead of the question “how not to pay taxes”, business is faced with the question “how to save on taxes”. When it comes to the IP Box regime, “how” turns into “where” and the answer is in Cyprus.
IP Box stands for Intellectual Property Box, also referred to as Patent Box and Knowledge Development Box. It is a favorable tax regime for profits from innovation and investment in intellectual property. This tax regime is extremely beneficial for IT business and companies that develop technology and spend a lot on Research and Development (R&D).
Qualifying assets are:
Qualifying assets are not:
IP Box important points
The regime can be used only if the qualifying asset is created or modified in Cyprus.
A scheme, when a Cypriot company exists only on paper and the completed qualifying asset is given to it, will not work. For example, a Russian company developed an antivirus, registered a company in Cyprus and handed it a ready-made program to reduce income tax. In this case, the favorable tax regime is not applicable, since the software was not created or modified by a Cypriot company.
A Cypriot company developed a new battle royale game. It spent € 500 thousand, made a profit of € 1 million and wants to cut taxes as much as possible.
Case 1: made the game, modified it on the side
The company created the game, paid € 300 thousand to full-time employees and spent € 200 thousand on the services of third-party developers from India, for a total of € 500 thousand.
In this case, the tax will be reduced as much as possible: the company itself created the game, outsourcing was from third-party companies, so all profits are considered qualifying.
Profit - € 1,000,000, tax - € 25,000, effective tax rate - 2.5%.
Case 2: bought the game, modified it on the side
The company bought the game for € 300,000 and spent € 200,000 on the services of third-party developers from India, for a total of € 500,000.
Here the tax will not be reduced to maximum: outsourcing was from third-party companies, but the company did not make, but bought the game, which reduces the qualifying profit.
Profit - € 1,000,000, tax - € 73,000, effective tax rate - 7.3%.
Case 3: bought the game, modified it with a related company
The company bought the game for € 300 thousand and spent € 200 thousand on the services of developers from an affiliated Russian company, for a total of € 500 thousand:
It will not be possible to reduce the tax in this case - the Cypriot company itself did nothing; the game was bought, and was modified by an affiliated company.
Profit - € 1,000,000, tax - € 125,000, effective tax rate - 12.5%.
You can see the tax rate formula and our detailed calculations in examples here.
Examples show how to reduce the tax rate up to 2.5%.
Maximum benefit: the company creates the product itself with the help of full-time employees or third-party developers, or buys and seriously modifies it.
Minimum benefit: we buy a completed product, do not modify it or modify it with related companies.
Advantages of IP Box regime in Cyprus
IP-box is a favorable tax regime that encourages companies to invest in innovation and intellectual property. Beneficial for IT business and companies that spend a lot on R&D.
IP Box is applied to:
In Cyprus, the IP Box regime can significantly reduce income tax - up to 2.5%. To calculate the tax rate, you calculate qualifying income; its 80% is not taxed, the remaining 20% are taxed at a rate of 12.5%. The profit rate varies from 12.5% to 2.5% depending on the cost of R&D