Examples

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:

STRUCTURE

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:

whether the asset was internally developed or whether it was acquired, and
whether subsequent R&D costs were outsourced to related parties or to third parties.

The Scenarios to be examined are as follows:

The asset was created/developed/improved internally, with R&D costs being undertaken by the company itself
The asset was acquired, with subsequent R&D costs for improvements of the asset being were outsourced to non-related parties
The asset was acquired, with subsequent R&D costs for improvements being outsourced to related parties

For the purposes of the examples, the following figures are used:

	Scenario 1 EUR	Scenario 2 EUR	Scenario 3 EUR
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.