An increasing number of tech giants and start-ups continue to establish their regional headquarters in Cyprus, as the ultimate location to hold and manage their Intellectual Property (‘IP’) and make use of the Cyprus IP Box Regime. The Cyprus IP Box Regime is an attractive tax incentive, adopted to promote research and development activities in the field of IP. The objective of the Cyprus IP Box Regime is to tax the income deriving from licences, sublicences, a sale or a transfer of Qualified IP assets while providing incentives for companies to carry out research and development (“R & D”) of their IP. The result is a flexible legal framework, providing a multitude of development opportunities in the IP field and attracting foreign investment into the island’s economy. Businesses which fall under the ambit of the Cyprus IB Box Regime and satisfy the specific criteria established by the Regime, capitalize on an effective corporate tax rate of 2.5%, being on one of the lowest in Europe, even amongst other EU Member states which have also adopted an IP Box Regime.
As an IP is a valuable asset for any organisation, it is important to choose a suitable jurisdiction for IP business set up, considering factors both in terms of tax, legal framework and growth potential. With the adoption of the IP box regime and being an EU member state, Cyprus is considered a strong strategic and favourable location for the establishment, development and centralization of IP, offering a full legal framework for the registration, protection and management of IP in line with international standards of both the World Intellectual Property Organization (WIPO) and the European Union Intellectual Property Office (EUIPO). Businesses involved in R & D of IP should make sure to adopt proper structures to utilise this unique tax regime effectively.
For a Cyprus company to take advantage of the Cyprus IP Box Regime, it must generate Qualifying Profits from Qualifying IP Assets. This article will outline the specifics of the Cyprus IP Box Regime, the conditions which must be met to minimise the tax burden for businesses operating in the field and generally provide useful information for effective implementation and set up of corporate structures for such companies.
1. What is a Qualifying IP Asset?
IP can be defined as the creations of the human mind, including a broad variety of intangibles such as, inventions, designs, literary and artistic works. These creations may include images, names, designs, manufacturing or marketing practices, algorithms, software programs, etc. IP can be split into four general categories to include trademarks, patents, copyrights and trade secrets.
The significance of IP as an asset is in the value it brings to a business. Often as a key revenue generator, and as an asset which when registered distinguishes and protects a business’s brand, its products or services, it’s R&D materials and inventions from unauthorised use by competitors. IP paves a business’s technological path in the specific field while creating a stronger negotiating position for licensing and filing of counter-claims.
Under the Cyprus IP Box Regime a Qualifying IP Asset is one which was acquired, developed or exploited by a person in the course of carrying out a business and is a result of R &D activities and includes:
- patents,
- copyrighted software programs, and
- other intangible assets that are non-obvious, useful and novel including utility models, IP assets which provide protection to plants and genetic materials, orphan drug designations.
For the purposes of the Cyprus IP Box Regime, Qualifying IP Assets do not include business names, brands, trademarks and copyrights or other rights and or assets used for the marketing of products and services.
2. Who are Qualified Persons?
Qualifying Persons include Cyprus tax resident taxpayers, tax resident Permanent Establishments (PEs) of non-tax resident persons as well as foreign PEs that are subject to tax in Cyprus.
3. What are Qualifying Profits?
Qualifying Profits are calculated in accordance with the ‘Nexus approach’ and are a proportion of the overall income (OI) derived from a qualifying asset, corresponding to the fraction of the qualified expenditure (QE) plus the uplift expenditure (UE) over the overall expenditure (OE) related to the R & D costs of an IP assets and incurred over the life of an IP asset.
The Nexus fraction formula for the calculation of the Qualifying profits is as follows:
QP = OI X (QE+UE)/OE
The Nexus principle determines the amount of Qualifying profits which will be factored in for the relevant deduction to the taxpayer. In essence, the level of qualifying profits strongly depends on the extent to which an applicant carries our R&D activities for the development of a Qualifying IP asset within the same company in Cyprus.
Qualifying profits include royalty income, licensing fees, compensation income, trading profits from the disposal of IP, capital nature gains form the disposal not subject to any tax.
4. What is Qualifying Expenditure?
Qualifying Expenditure includes:
- salary and wages
- direct costs
- general expenses related to installations used for R & D
- commission expenses associated with R&D activities
- costs associated with R & D expenditure outsourced to unrelated parties. (non-related persons)
*Any acquisition costs of the IP, interest paid or payable or any amounts payable to related people carrying out R&D will not be considered eligible for the purposes of expenditure.
Qualifying Expenditure does not include:
- costs for acquisition of intangible assets
- interest paid or payable
- costs for acquisition or construction of immovable property
- amounts paid or payable directly or indirectly to a related person to conduct R&D activities, regardless of whether such amounts relate to cost sharing agreements
- costs which cannot be proved directly connected to a specific Qualifying IP asset

Result: Tax Effect under the Cyprus IP Box Regime
Under the Cyprus IP regime, 80% of the Qualifying Profits generated from the Qualifying IP Assets are deemed to be a tax-deductible expense for Qualifying Persons (taxpayers) and as such are exempt from tax. In practise, this means that only the 20% of IP income is taxed at a corporate tax rate of 12.5%. Consequently, Cyprus-resident companies can fundamentally benefit from a favourable low tax rate of 2.5% on 80% of the Qualifying Profits. Additionally, no tax is imposed on the sale of a Qualifying IP asset, provided the sale is of capital nature. (rather than trading nature).
What should you consider when establishing your IP Tech Company?
A. Who is the owner of the Qualifying IP Asset?
For a company to qualify under the Cyprus IP Box Regime, it should be the owner of the Qualifying IP Asset and bear the risks and rewards of the exploitation of the IP asset.
B. Who bears the R & D costs of the Qualifying IP Asset?
To maximise the tax benefits under the Cyprus IP Box Regime, the company should incur the R & D expenditure in relation to the Qualifying IP Asset. The higher the R & D expenditure of the company (the applicant) the higher will be the amount of profit which will be considered for the purposes of the 80% tax exemption. This may also include R&D services outsourced to non-related parties. In this case, it is very important for businesses to ensure they have proper bookkeeping and recording procedures in place for the upkeep and storage of relevant expenses, accounting records and supporting documentation to later on prove the direct R & D expenditure of the applicant company under the Cyprus IP Box Regime.
C. Should you register for VAT?
The supply of an IP asset is considered as a supply of services and the general rules for the place of supply of services apply for VAT purposes. In this case, where a Cyprus resident company acquires an IP asset and/or R&D services from foreign suppliers with the intention to exploit the IP asset and derive income, this can result in the company being considered as a taxable entity for VAT purposes, triggering a potential VAT registration obligation and other reporting requirements. The way in which the company will exploit the acquired IP asset and/or develop the Qualifying IP Asset as well as the type(s) of income that they it will derive, will determine the appropriate VAT treatment. It is therefore important to seek professional advice to ensure that your company will properly adhere to any local as well as foreign legal requirements for VAT purposes.
D. Will your tech company employ staff in Cyprus?
Under Part B, we mentioned the need for a Cyprus company to incur most of the R&D costs of the IP asset in Cyprus, in-house to be able to maximise the benefits under Cyprus IP Box Regime. It follows that applicants should strongly consider opening an office in Cyprus and employing staff locally for the R & D activities of the IP asset, to allow themselves to maximise the tax exemption they will apply for under the Cyprus IP Box Regime. The company will need to demonstrate to the tax office that it has sufficient economic substance in Cyprus through the renting of an office (or office ownership) and hiring local staff, thereby establishing physical presence locally. This will involve considerations in terms of arranging work permits for employees (where applicable) and finding a suitable workplace. Professional advice should be sought on the immigration requirements of any non-local staff to be hired by the company.
Benefits of the Cyprus IP Box Regime
- Attractive Effective Tax Rate: The 2.5% effective tax rate on qualifying IP profits makes Cyprus one of the most competitive jurisdictions in Europe for holding and exploiting IP assets.
- Fostering Innovation: The low effective tax rate under the Cyprus IP Box Regime incentivises companies to invest in innovative ideas, develop them and create value IP assets in various sectors such as pharmaceuticals, technology and clean energy solutions. This not only places valuable innovative products on the local market but also boosts the overall economy and favourability of the island.
- Competitive Advantage: The preferential tax treatment can enhance a company’s competitiveness in the global market, especially if the company plans to attract foreign investment.
- Strategic Location: The Cyprus IP Box Regime serves as a getaway to the European Market, to Middle East and the North African Markets offering a stable and robust legal framework for growth, fully aligned with IP treaties and conventions, such as WIPO and EUIPO.
- Financial Planning: Companies which benefit under the Cyprus IP Box Regime can structure their finances in an efficient manner for growth and long-term investment, optimising their higher after-tax (net) returns.
- Wide Network of Double Tax Treaties: Cyprus grants access to a wide network of double tax treaties with over 60 countries. This in turn minimises withholding taxes on royalty payments allowing companies to expand their network and overcome international tax challenges.
How to set up you IP business in Cyprus?
- Register your Cyprus company – where this company will be entirely owned by the owner(s) of the IP.
- Obtain a consultation on how to structure your operations.
- Start R & D activities with proper organization in place in terms of bookkeeping and documentation.
- Rent or purchase an office in Cyprus to establish physical presence.
- Employ local staff.
- Transfer of IP’s ownership to the newly incorporated Cyprus company in case of ready IP assets.
- Licence out the rights to use the IP to any other company.
- Register your IP assets for proper protection against unauthorised use.
- Preparation of legal agreements to effectively organise the IP box structure.
- Apply for the exemption under the Cyprus IP Box Regime to the tax office with the presentation of full supporting documentation.
How to Apply for the Cyprus IP Box Regime?
Structuring operations and applying for the tax exemption under the Cyprus IP Box Regime involves following a structured process with various conditions.
- Determine Eligibility: Ensure that your company is eligible for the exemption and can be considered a Qualifying Person. for the purposes of the Regime.
- Identify Qualifying IP Assets: Identify the intangible IP assets which fall under the definition of such under the regime. These IP assets must be the result of R & D activities with the purpose of further exploitation of the IP asset and income generation.
- Calculate Qualifying Expenditure: Calculate the costs directly related to the development, creation and research of the IP asset falling under Qualifying Expenditure.
- Calculate Qualifying Profits: Determine the proportion of the overall income corresponding to Qualifying Profits using the Formula.
- Claim the Tax Deductible Expense: Claim up to 80% of the overall profit derived from the Qualifying IP Asset as tax deductible, provided the applicant has proven physical and economic presence Cyprus in accordance with the Nexus Principle.
- Maintain Proper Records: Keep detailed accounting records on all expenses and income generated by the company in regard to the development and exploitation of the Qualifying IP Asset. Accurate documentation is crucial for compliance and success in claiming the tax benefits under the Regime.

Conclusion
Due to their non-physical character, IP is not usually geographically fixed and can be relocated relatively easy between different jurisdictions. It is thus a beneficial strategic decision for IP focused companies to use this flexibility and reduce their overall tax burden by allocating IP to companies set up in countries with an advanced, prestigious and EU recognised, IP box regime such as Cyprus.
Cyprus remains a preferred jurisdiction for IP centralization for companies that aim to safeguard their IP throughout EU, while adopting tax optimized structures. The IP field is a continuously developing area, with business and international organisations, understanding the significance of IP assets on their balance sheets and the growth potential in commercial exploration of IP through right-of use. IP surely plays an important role in fostering innovation and R & D activities, in an era of constant technological advancement.
The Cyprus IP Box Regime is a highly attractive option for businesses engaged in research, development, and exploitation of IP. Its favourable tax treatment (resulting in an 80% tax exemption on Qualified Profits), combined with Cyprus’s business-friendly environment, international compliance, and strong legal framework, makes it an ideal jurisdiction for companies seeking to optimize their tax structures and maintain their competitive edge on the global market.
How can we assist?
Our legal advisors have knowledge and practical experience in the field of IP. We are able to:
- Review current business structure and provide advice in respect of IP business set up or relocation;
- Full company registration and set-up;
- Tax and accounting compliance assistance throughout the life of the business and the IP assets;
- Assistance with immigration matters for the set -up of physical presence in Cyprus;
- Assisting with the preparation and filing of the application to the tax office, preparation and provision of supporting documentation for the examination of the application;
- Continuous support during examination of the application to the tax office in order to obtain the exemption;
- Assistance with the registration of IP assets with EUIPO, WIPO and EPO;
- Administration of IP assets post registration;
- Filing for an oppositions in regards to the IP asset;
- Tax efficient transfer of existing IP to the Cyprus IP company;
- Preparation of required contracts and legal paperwork for any transfer, licensing, maintenance and disposal of an IP asset.
The information provided above by C. Pilyugin & Co LLC is intended for general information purposes only and should not be construed as professional or legal advice in any sense. It is advised that readers should refrain from acting only on the basis of the above information without first obtaining legal or professional advice on the subject.
Please send an email to [email protected] or fill out the form below to book a consultation with us.