Assume that a Cyprus IP company licenses its IP to operating foreign companies and in return receives an annual royalties income of 1,000,000 Euros:
The expected annual tax for the Cyprus IP Company will would be as follows:
| Annual Royalty Income | €1,000,000 | |
| Direct Expenses (assumed) | €200,000 | |
| Net Income | €800,000 | |
| 80% deemed deduction | €640,000 | |
| Taxable Income | €160,000 | |
| Income tax on 160000 | €20,000 | |
| Effective Tax Rate | 2.50% | €20,000 |
| Tax Rate without IP Box | 12.50% | €100,000 |
To put things in perspective, we set out an additional numerical example illustrating how, under the new IP regime, one would reach the QP stage on which 80% notional deduction would be applied.
For the purposes of the examples, it is assumed that the qualifying intangible asset was acquired/developed after 30 June 2016, thus it qualifies for the New IP Regime.
The variable factors in the examples are:
The Scenarios to be examined are as follows:
For the purposes of the examples, the following figures are used:
|
Scenario 1 |
Scenario 2 |
Scenario 3 |
|
|
Overall Income (OI) from qualifying IP (after deduction of direct costs incurred for generating the income) |
1,000,000 |
1,000,000 |
1,000,000 |
|
Overall Expenditure (OE) |
|
|
|
|
Cost of acquisition of asset |
N/A |
300,000 |
300,000 |
|
R&D costs incurred internally for creation and development of the asset |
500,000 |
N/A |
N/A |
|
R&D costs for improvement of the asset, outsourced to non-related parties |
N/A |
200,000 |
N/A |
|
R&D costs for improvement of the asset, outsourced to related parties |
N/A |
N/A |
200,000 |
|
|
500,000 |
500,000 |
500,000 |
|
Qualifying Expenditure (QE) |
|
|
|
|
Internal R&D for creation and development of the asset |
500,000 |
N/A |
N/A |
|
R&D for improvement of asset outsourced to non-related Parties |
N/A |
200,000 |
N/A |
|
|
500,000 |
200,000 |
N/A |
|
Uplift expenditure, being the lower of: |
|
|
|
|
30% of the qualifying expenditure, and |
150,000 |
60,000 |
0 |
|
Total cost of acquisition plus cost of outsourcing R&D to related parties |
0 |
300,000 |
500,000 |
Applying the above figures to the formula for calculation of the qualifying profit (QP) and the tax benefit of up to 80% as a notional deduction, we have:
|
|
QE+UE QP = OI x ------------- OE |
QP for 80% tax benefit |
Tax benefit: 80% of QP as notional deduction |
|
Scenario 1: |
€1,000,000 x [(€500,000 + €0) / €500000] |
€1,000,000 |
€800,000 |
|
Scenario 2: |
€1,000,000 x [(€200,000 + €60,000) / €500000] |
€520,000 |
€416,000 |
|
Scenario 3: |
€1,000,000 x [(€0 + €0) / €500000] |
€0 |
€0 |
As a result the IP tax benefit will be:
|
Scenario 1: |
Taxable profit will be decreased by €800,000 notional expense |
|
Scenario 2: |
Taxable profit will be decreased by €416,000 notional expense |
|
Scenario 3: |
No notional expense applies |
NOTE:
In scenario 1, the entire amount of the overall income is considered to be qualifying profit, due to the fact that the development of the asset was carried out internally, and so were the subsequent R&D costs for improvement of the asset (it is noted that if the R&D costs were subcontracted to a third party, they would still have qualified).
On the other hand, in scenario 2 (asset acquired) the amount of qualified profit is significantly lower, and in the case of scenario 3 (asset acquired and R&D costs outsourced to related parties), none of the profit qualifies for the regime.
