The Cyprus IP Box Regime: From Tax Haven to Tax Hub
The government of Cyprus has implemented a series of economic reforms aimed at attracting intellectual property-focused businesses. TMF Cyprus’ Managing Director, Andreas Constantinides, suggests that the rapid modernisation of the Cyprus economy should give IP-rich international companies cause to look closely at its ‘fast-track business activation scheme’.
Having joined the European Union in 2004 and the euro in 2008, Cyprus has been busy transforming itself, and it has not been considered a tax haven for some time. In the OECD’s EOIR table (transparency and exchange of information on request) Cyprus has the same rating as the United States, Germany and the United Kingdom. For international technology businesses it is now one of the most supportive and welcoming places inside the EU.
The island’s political and fiscal systems are stable and business-friendly, with the usual EU benefits of visa-free travel and numerous trade agreements and double-taxation treaties. The regulatory and legal systems are easy to navigate because they are based on English common law. A unique position on the very rim of Europe makes it a perfect location for businesses with the markets of the Middle East and North Africa in mind.
The IP taxation system – modernised in 2016 – is robust, flexible and generous, and yet fully-compliant with EU and international legal and regulatory frameworks, including the WIPO (a member since 1984) and the OECD’s Base Erosion and Profit Shifting regime (BEPS).
Not surprisingly, Cyprus has attracted significant technology-based and IP-rich businesses in recent years. But for mobile tech businesses looking for a new home fiscal incentives are only one part of the story. Cyprus’s new fast-track business activation scheme is now targeting their skills needs as well.
Having joined the European Union in 2004 and the euro in 2008, Cyprus has been busy transforming itself, and it has not been considered a tax haven for some time.
Technology and innovation are at the heart of the Cyprus government’s long-term growth and development plans. It actively develops high-quality infrastructure such as 5G, satellite and highspeed broadband. A new research and innovation strategy (2019-23) has recently doubled the technology development budget. A new Deputy-Ministry of Research, Innovation and Digital Policy has been created specifically to guide the continuing digital transformation of the island. Pre-pandemic growth in the domestic ICT market was also strong (3% in 2018) – particularly so in the non-telecoms (6.5%) and services (9%) segments – having bounced back very well from the financial crisis, as much of the Cypriot economy did.
The already swift digitalisation of government has been accelerated in response to the pandemic. Some 160 government services are already online, among them the registrar of companies and the tax department. Setting up a company and managing the associated certificates and filings, including tax returns, can now all be done via the respective authority’s online hubs.
Cyprus’s intellectual property taxation regime was comprehensively updated back in 2016. It is modern, fully aligned with Action 5 of the EU’s Base Erosion Profit Shifting (BEPS) project, and very competitive.
The effective tax rate on IP-related profits is just 2.5% because the basic rate of corporation tax is 12.5% (one of the lowest in the EU) and an IP-holder of a qualifying intangible asset can treat up to 80% of the profits as notional expenses (depending on how much research and development was put into creating it). ‘Qualifying assets’ include any IP, or product of R&D, that is acquired, developed or exploited in the course of business. Patents, software, computer programs and other kinds of ‘useful’ and ‘original’ intangible assets all qualify, but not marketing-related IP such as brands and image rights.
Cyprus’s intellectual property taxation regime was comprehensively updated back in 2016.
There should be no surprise that Cyprus is now a recognised hub for software development, R&D and systems integration. NCR, AMDOCS, 3CX, Wargaming and Viber all having major operations here, alongside the significant presences of many of the biggest global technology companies.
But none of its many advantages has made Cyprus immune to one of the most significant challenges facing many growing ICT companies – skills shortages. A new ‘fast-track business activation scheme’ is part of the Cyprus government’s response.
Fast-track business activation
This ‘one-stop’ service – run by the Ministry of Energy, Commerce and Industry – fast-tracks all company, employment, tax and operating registrations and permits, helping foreign investors quickly get their businesses fully-established.
Importantly, the residency and employment rules have also been revised in priority skills areas. This has greatly reduced both the administration burden for incoming tech companies and the stress felt by relocating staff by creating a much simpler, less bureaucratic and more supportive recruitment environment. Existing visa holders can also benefit from the new residence and employment rules. There are no stay limits and family reunification is normally straightforward.
To be eligible for the benefits the scheme offers, the foreign company must satisfy three main conditions:
- Third-country shareholders must be in the majority (if not, then the foreign-owned share capital must be at least €200k);
- Direct investment must be at least €200k; and
- The business must occupy proper, independent, commercial premises.
Management and administration
Companies that can satisfy the criteria are given every help to bring in directors, managers and specialists from any third country, subject to the usual due diligence checks and quotas for each category of employee. Directors, senior managers and project/department heads must be limited to five in number (unless a convincing case can be made for more) and earn no less than €4,000 per month gross.
Middle managers and key administrative staff are limited to ten (again, except in special cases) and must earn at least €2,000 monthly.
Employment of technical experts and professionals from third countries is also subject to the €2,000 per month salary minimum, but numbers are limited according to the size of the business, while the skills and professions eligible are restricted to those parts of the economy considered to be a strategic priority.
Companies with annual turnover of less than €1 million are limited to five foreign technical specialists. This rises to between 100 and 200 for a company turning over more than €30 million. In between are five intermediate quotas, each determined by turnover.
The full list of priority skills does include the marine engineers and naval architects needed by one of Cyprus’s oldest industries, shipping. But more than three-quarters of them are ICT- and pharma-focused roles: engineers specialising in software and systems, telecoms and space, machine learning and DevOps; programmers, developers, and other specialists in applications and data architectures, AI and machine intelligence, augmented and virtual reality, big data, user-experience design, cyber security, mobile computing and applications development; as well as pharmaceutical technologists, engineers, QA experts and IP specialists.
The full package
Cyprus’s generous, user-friendly IP-taxation regime had already made it an attractive and popular new home for high-tech and IP-rich companies. Now it has the start-up support and third-country recruitment incentives to match.
Andreas Constantinides, Managing Director
Stadyl Building, 4th Floor, 10-12 Florinis street, Nicosia 1065, Cyprus
Tel: +357 22 451 327
TMF Group is a leading provider of international business administration services. Its Cyprus team includes lawyers admitted as members of the Cyprus Bar Association, ACCA-qualified accountants, and members of the local fiduciary, accountancy and tax bodies.
Andreas Constantinides is Managing Director of TMF Cyprus. A skilled leader and lawyer, he has been called to the bar in England and Wales and in Cyprus, and bears a track record of success in both financial services and corporate governance.
 The shareholding requirement does not apply to: companies listed on a recognised stock market; Cypriot companies in shipping, high technology and pharmaceuticals; onshore companies that began life offshore (and were approved by the Cyprus Central Bank); or citizens naturalised according to economic criteria.