Cyprus has emerged as a thriving tech ecosystem, positioning itself as a preferred destination for ICT companies, tech entrepreneurs, and talent from around the globe. The island offers a powerful combination of robust IP protection, attractive tax incentives, and a high quality of life. In this insight, we highlight some key statistics showcasing the growth of the ICT sector in Cyprus, the main characteristics of the Cyprus IP Box regime, relocation incentives for tech talent, and benefits for shareholders of IT companies.
Statistics Show a Rapidly Growing ICT Sector
In recent years, Cyprus has seen remarkable growth in its Information and Communications Technology (ICT) sector. The industry contributed over €3 billion to the Cypriot economy in 2022, accounting for 13% of the country’s GDP. This is a significant increase from 7% in 2019 and 8.5% in 2020. The influx of international firms and specialized talent has been a key driver of this growth.
Various organizations, including some of the largest tech associations in Cyprus, have played a crucial role in enhancing the business environment for tech businesses. Their efforts have not only boosted the sector's growth but have also contributed significantly to the country’s economic prosperity.
The ICT sector in Cyprus is undergoing significant development, supported by initiatives aimed at strengthening the Cyprus technology ecosystem. Central to these efforts is the establishment of the Deputy Ministry of Research, Innovation, and Digital Strategy, dedicated to promoting scientific research and investing in innovative entrepreneurship. Additionally, the local tech industry benefits from public programs designed to cultivate local talent. These initiatives, coordinated by the Research & Innovation Foundation and Cyprus' Recovery and Resilience Plan, involve collaborations between three public universities, the Nicosia municipality, and a range of international partners.
Furthermore, the ecosystem has been enriched by the presence of startup accelerators, non-profit tech associations, and tech events such as hackathons, all of which contribute to a thriving tech community in Cyprus.
Cyprus IP Box: A Game-Changer for Tech Companies
The Cyprus IP Box regime offers substantial financial benefits and robust international protection for IP assets. Here's a detailed look at how the regime works and its benefits:
Overview
Patent box regimes, often referred to as intellectual property (IP) regimes, provide lower effective tax rates on income derived from IP. Commonly, eligible types of IP include patents and software copyrights. The income derived from IP can encompass royalties, licensing fees, gains on the sale of IP, sales of goods and services incorporating IP, and patent infringement damage awards.
The primary aim of patent boxes is to encourage and attract local research and development (R&D) activities and incentivize businesses to locate their IP in the country. This strategy has been relatively widespread in Europe, with most regimes implemented within the last two decades.
The Nexus Approach
The Cyprus IP regime follows the nexus approach, which requires a direct link between the income benefiting from the IP rules and the extent to which the taxpayer has actually performed the underlying R&D that generated the IP asset. This approach ensures that there is a connection between qualifying income and qualifying expenses for the IP regime to apply. Under these rules, 80% of the qualifying profits derived from the qualifying intangible asset is treated as a deemed deductible expense.
Qualifying Assets
Qualifying assets under the IP regime are those acquired, developed, or exploited by a taxable person in the course of its business as a result of R&D expenditure, for which the person is the economic owner. This excludes any IP related to marketing. Qualifying assets include:
- Patents
- Copyrighted software programs
- Other intangible assets that are non-obvious, useful, and novel
This means a software system (game/application/program) qualifies as a “qualifying asset”, since it represents a copyrighted software program.
Qualifying Expenditure
Qualifying expenditure includes all R&D expenses incurred wholly and exclusively for the development, enhancement, or creation of the qualifying assets. These expenditures include:
- Salaries, wages, and other direct costs associated with R&D activities
- General expenses associated with R&D activities
- Commission expenditure associated with R&D activities
- R&D expenditure outsourced to unrelated parties
Excluded from qualifying expenditure are costs such as acquisition costs of intangible assets, interest paid or payable, expenditure for acquisition or construction of immovable property, and costs related to R&D outsourced to related parties.
Tax Benefits
- Tax Deduction: 80% of qualifying profits from qualifying intangible assets are treated as deemed deductible expenses. This can result in an effective tax rate of just 2.5%.
- Tax Amortization: the capital costs of qualifying intangible assets can be amortized over the useful economic life of the asset, up to a maximum of 20 years.
- Exemptions: capital gains from the disposal of qualifying assets are fully exempt from taxation.
Other Considerations
- VAT Implications: IP companies in Cyprus must register for VAT and may apply reverse charge provisions for services acquired from abroad.
- Arm’s Length Principle: royalties or license fees from related companies must reflect market values to avoid additional deemed income assessments.
Relocation Incentives for Tech Talent
Cyprus offers several incentives to attract tech talent and international professionals, including
- Low Cost of Living: Cyprus boasts a relatively low cost of living compared to other EU countries.
- Quality of Life: the island is known for its high quality of life, excellent healthcare, and educational facilities.
- Personal Income Tax Incentives include exemptions for new residents and favourable tax rates for high earners, such as:
- 50% exemption:
- Individuals who were not tax residents of Cyprus for at least 15 consecutive years immediately prior to their first employment in Cyprus can benefit from a 50% exemption on their income tax from employment. This exemption applies to income exceeding €55,000 per year, for employment commenced after 1 January 2022.
- The exemption is granted once in a lifetime and lasts for a maximum of 17 years or until repeal of the relevant provisions (whichever occurs first), commencing from the tax year of first employment in Cyprus.
- The Law does not require the individual to become a Cypriot tax resident nor the employer to be a Cypriot tax resident to qualify for this incentive.
- 20% exemption:
- Individuals who take up first-time employment in Cyprus after 26 July 2022, after at least three consecutive years of employment outside Cyprus with a non-Cypriot resident employer, can benefit from a 20% income tax exemption. This exemption is capped at €8,550 per year.
- The exemption applies for seven tax years, commencing from the tax year following the first year of employment in Cyprus.
- The Law does not require the individual to become a Cypriot tax resident nor the employer to be a Cypriot tax resident to qualify for this incentive.
Benefits for Shareholders: The Non-Dom Offering and 60 Days Tax Rule
For shareholders of IT companies, Cyprus offers the following tax benefits:
- Non-Domiciled (Non-Dom) Status: Non-Doms in Cyprus benefit from zero tax on dividends, interest, and rental income earned abroad, for a maximum of 17 years. This status is available to individuals who were not tax residents in Cyprus for 17 out of the last 20 years.
- 60 Days Tax Rule: Individuals can become tax residents in Cyprus by spending at least 60 days in the country, provided they meet certain conditions, such as not being tax residents in any other jurisdiction and maintaining a permanent residence in Cyprus.
Conclusion
Cyprus stands out as a premier destination for ICT companies and professionals, offering a great combination of strategic location, favourable tax incentives, and a supportive business environment. Whether you are an entrepreneur looking to protect your IP, a tech professional seeking new opportunities, a venture capital firm, a fund, or an investor aiming to maximize returns, Cyprus provides the incentives and infrastructure to help you succeed.
For more information on how we can assist you with your relocation or business setup in Cyprus, please contact Andreas Mercouri, Managing Director, at amercouri@tridenttrust.com.