IP Box Companies with 2.5% Effective Tax Rate
A Cyprus Intellectual Property (IP) holding company refers to a business entity established in Cyprus for the purpose of owning, managing, and licensing intellectual property assets. Cyprus has become a popular destination for IP holding companies due to several advantages that are provided.
Intellectual Property (IP) can be one of the most valuable assets of an organisation. It is a very important business decision to choose the right location to setup an IP holding company.
Furthermore, the protection of intellectual property rights of an enterprise may provide financial value, which shall contribute to its profitability and further development through exclusive commercial exploitation, sale of rights, licensing their use to third party beneficiaries, as well as exploiting them as security for obtaining financing.
Additionally, Cyprus is a signatory to a various international treaties and agreements related to intellectual property, providing companies with greater protection on a global scale.
IP Box Regime:
The new Cyprus IP Box regime which was introduced on 1st of January 2016, provides a reduced tax rate on income generated from qualifying IP assets, with the aim of promoting innovation and research and development (R&D) activities in Cyprus.
Qualifying Intangible assets:
- Patents,
- Copyright software programs
- Other intangible assets that are non-obvious, useful and novel.
Ineligible IP assets:
- Business names
- Trademarks
- Image rights
- Marketing activities
Benefits of a Cyprus IP holding company:
- 80% exemption of profits derived from the sale of IP assets and on the net profits derived from the use of IP assets.
- Cyprus has implemented an Intellectual Property Box (IP Box) regime that provides a significantly reduced tax rate on income derived from qualifying IP assets. Under this regime, only 20% of the net profit generated from qualifying IP assets is subject to tax, resulting in an effective tax rate of as low as 2.5%.
- Capital Gains Tax Exemptions: Cyprus offers exemptions from capital gains tax on the disposal of IP assets, including the sale, transfer, or licensing of intellectual property. This can be particularly advantageous for companies looking to monetize their IP assets or engage in IP-related transactions.
To provide an example of the expected annual tax for a Cyprus IP company, let's assume the following scenario:
- The Cyprus IP company generates net profit solely from licensing intellectual property assets.
- The company qualifies for the Intellectual Property Box (IP Box) regime in Cyprus.
- The applicable corporate tax rate is 12.5% for income not eligible for the IP Box regime.
Under the IP Box regime, only 20% of the net profit derived from qualifying IP assets is subject to tax. This effectively results in a reduced tax rate of 2.5% on qualifying IP income.
Let's assume that the Cyprus IP company generates a net profit of €500,000 from the licensing of its intellectual property assets.
Calculation
- Calculate the portion of income subject to the IP Box regime: €500,000 x 20% = €100,000
- Calculate the tax payable on the IP Box income: €100,000 x 2.5% = €2,500
- Calculate the tax payable on the remaining income (not eligible for IP Box regime): (€500,000 - €100,000) x 12.5% = €50,000 x 12.5% = €6,250
- Total tax payable: €2,500 + €6,250 = €8,750
In this example, the expected annual tax for the Cyprus IP company would be €8,750.
It's important to note that this is a simplified example, and the actual tax liability can vary depending on various factors, including the specific circumstances of the company, the application of the IP Box regime, and any other applicable tax regulation.
How a Lawyer can assist with the Incorporation of a Company with IP in Cyprus?
A skilled lawyer can offer vital assistance throughout the incorporation journey of your Company:
1. Legal Consultation and Structuring:
- Initially, the lawyer will assess the client's business objectives and intellectual property assets to determine the most suitable corporate structure for the Company.
- The lawyer will provide the client with legal advice on the registration and protection of intellectual property rights in Cyprus, Europe and Internationally.
2. Company Registration and Compliance:
- The lawyer will guide the client through the company registration process, ensuring all necessary documents are prepared and submitted correctly.
- They will assist in fulfilling compliance requirements, such as drafting the Memorandum and Articles of Association and obtaining the required licenses and permits.
3. Intellectual Property Registration and Protection:
- Registering intellectual property rights is crucial for their legal recognition and protection. The lawyer will assist in filing trademark and patent applications with the Cyprus Registrar of Companies and other relevant authorities.
- They will help draft licensing agreements and contracts to safeguard the client's intellectual property and prevent unauthorized use.
4. Tax Planning and Optimization:
- A lawyer with the assistance of a skilled auditor in Cyprus tax laws; will help the client adjust their tax position and take full advantage of the Intellectual Property Box Regime.
- They will advise on transfer pricing and other tax-related matters to ensure compliance with local regulations and international tax standards.
5. Contractual Agreements:
- A lawyer will play a vital role in drafting, reviewing, and negotiating various contractual agreements, such as licensing agreements, distribution agreements, and joint ventures.
- These agreements are essential for protecting the client's intellectual property while ensuring a fair and profitable relationship with other parties.
Incorporating a Cyprus Intellectual Property Company offers numerous advantages for businesses seeking to protect and capitalize on their intellectual property assets. The favorable tax regime, strategic location, and robust legal framework make Cyprus an attractive destination for companies operating in the intellectual property space.