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Cyprus Changes Tax Regime on Royalties

Cyprus Changes Tax Regime on Royalties

By Alex Hooft van Huysduynen

In late December 2015, the Ministry of Finance issued a press release on an amendment to the Intellectual Property tax regime.

The changes will incorporate the recommendations of Action 5 of the Organisation for Economic Co-operation and Development (OECD), which were issued on 5 October 2015 for the Action Plan against ‘Base Erosion and Profit Shifting’ (BEPS), as well as the conclusions to the ECOFIN Council adopted on 8 December 2015.

Amongst other topics, Action 5 deals with favourable tax regimes such as the Intellectual Property regime (IP regime). It requires a clear connection between the rights which create the income and the activity which contributes to that income (the modified nexus approach).

The Cypriot Authorities will amend the existing IP Regime by 1 July 2016; amendments made are likely to include transitional arrangements. Companies that join the scheme before this date will benefit from savings, up until mid-2021. Since 80% of worldwide royalty income generated from IP owned by Cypriot resident companies (net of any direct expenses) is exempt from income tax, the current regime provides for a maximum effective tax rate of 2.5% on income earned from IP assets. The comparable rate in other EU jurisdictions is at least twice that number.

EU jurisdictions limit the tax scheme to patents, and only offer a partial exemption for gains on disposal. This is less attractive than the Cyprus IP scheme, which also includes intangibles like software, trademarks and copyrights.

This modified nexus approach is not expected to significantly impact Cyprus Tax Laws.

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