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Cyprus Tax Treatment of Royalties – 13/9/2012

On 24th May 2012, the House of Representatives of Cyprus voted on a number of amendments to the Income Tax Law in order to establish Cyprus as a favorable jurisdiction for companies owning any kind of intellectual property rights, patents, and trademarks (collectively referred to as IPRs).

The amendment comes into effect from the 1st of January 2012.

Tax treatment

Prior to the amendment royalty income was taxed like any other income- that is at 10% corporation tax.

Under the new amendment, 80% of the net profit from the exploitation of IPRs is exempt from tax.

Net profit is derived by deducting all direct expenses. The remaining 20% of the net profit is taxed at the rate of 10% corporation tax, thus resulting in a maximum effective rate of 2.5%.

It should be noted that the amendment also provides for 80% of the profit on disposal of IPRs to be tax-free thereby not only providing tax benefits while holding the IPRs but also on their disposal, thus providing an exit route which is tax efficient.

Capital Allowances on the cost of acquisition of IPRs

The tax benefit of the first five years from the date of acquisition or development is even more attractive since the amendment also provides that the cost of acquisition or development of the IPRs is written off at the annual rate of 20%.

The company holding the IPRs will write off the cost within five years by claiming tax-deductible capital allowances at the annual rate of 20%.

In conclusion, the amendments to the Income Tax Law have resulted in a tax burden on income from the exploitation or disposal of IPRs with a maximum of 2.5% on the net profits, and this will be further reduced in the first five years of acquisition by claiming capital allowances at the rate of 20%.

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