Cyprus has introduced new rules for the application of the IP (Intellectual Property) box regime as of October 2016, following Cyprus Parliament’s approval of laws amending the Income Tax Law. The new legislation took effect as of July 1, 2016, with legal effect taking place upon publication in the Official Gazette of the Republic.

The provisions of the IP box regime have been aligned with the recommendations of the Organisation for Economic Co-operation and Development (OECD) Action 5 of the ‘Base Erosion and Profit Shifting (BEPS)’ plan on ‘Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance’.

IP assets that have already qualified under the existing IP box regime are subject to transitional provisions under the revised legislation; taxpayers will continue to benefit from the existing IP regime for a maximum of five years (until 30 June 2021), and thereafter, the new IP tax regime will apply.

The new IP regime complies with the provisions of the OECD recommended ‘nexus approach’. Under this, there needs to be a direct link between the qualifying income  - and the own qualifying expenses contributing to that income - in order for an intangible asset to qualify for the benefits of the regime.

Both the transitional and the new Cyprus IP box regime offer a tax benefit of up to 80% on qualifying IP profit, by way of notional expense deduction. A taxpayer may elect to claim part of the deduction only, or not at all.