Cyprus Changes Tax Treatment of Income from Exploitation of Intangible Assets

Cyprus companies are used for many different purposes by international investors. They are used as holding companies for investments in foreign subsidiaries, private portfolio investment vehicles, trading activities, supply of services, financing activities, investment fund activities and also for exploitation of intangible assets (intellectual property). 

Income from the exploitation of qualifying intangible assets, including the sale, may, provided that certain conditions are met, be subject to an effective tax rate of 2.5% only, based upon a provision in the Cyprus income tax laws allowing companies receiving such income a deduction equal to 80% of their chargeable profits from such exploitation.

Until recently, Cypriot legislation contained a so-called claw back provision in case of the sale of intangible assets. This provision meant that Cyprus companies had to prepare a balancing statement leading to a clawback of deductions previously claimed with the related tax amortization.

For example;

  • Cyprus company X Ltd acquires an intangible asset at the beginning of year 1 for 100;
  • X Ltd annually deducts amortization costs related to the acquisition for an amount of 5;
  • At the beginning of year 5, after having amortized 20 in the previous 4 years, X Ltd sells the asset for 130;
  • Under the old rules, X Ltd would have to pay corporate income tax over an amount of 50, consisting of 2 elements, one being the difference between the sales price and the acquisition price (130 minus 100) and the other being the clawback of the amortization of 20.  

However, the Cypriot income tax laws have been amended in such a way that in the above example there will not be an obligation to prepare a balancing statement upon the sale of the intangible asset anymore and a clawback of the previously amortized amount (20 in the example) is not required anymore.

So, practically speaking this means a tax relief for companies receiving income from the sale of intangible assets that have claimed amortization in connection with acquisition of these assets in previous years.  

Another change in the laws dealing with taxation of income from exploitation of intangible assets is that any tax amortization capacity not claimed by a Cyprus company in a certain year can be carried forward to future years over the remaining useful economic life of the intangible asset by such company.

The above-mentioned provisions enter into force retroactively as per 1 January 2020.

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