New Balkans Law Office (www.newbalkanslawoffice.com) is a law firm with a focus on cross-border transactions and aims to assist clients who are seeking to incorporate their businesses. The final choice of jurisdiction to incorporate is usually determined by the nature of the business itself, whereby the applicable tax regime is of significant importance. Thus, if the focus of your business is IP assets, you should pay particular attention to the IP box regime applicable in the prospective jurisdiction. In the following note, we will briefly consider the differences between the leading IP box regimes in Europe.
Historically, Cyprus is the most well-known and popular jurisdiction for IP box regimes, especially amongst countries includingBelgium, Hungary, Luxembourg, the Netherlands, France and the United Kingdom. Based on OECD figures, Cyprus has an effective tax rate of 2.5%, which is the lowest of all the compared jurisdictions (with the rest being 4.44%, 4.5%, 5.2%, 7%, 10% and 10% respectively). While it follows from this that Cyprus offers the most competitive regime from a taxation point of view, it should be noted that this should not be the sole criterion in deciding the final destination to incorporate your business as there are several other factors to be taken into account as well.
For example, certain IP assets are ineligible for Cyprus’ IP box regime, including business names, trademarks, image rights and marketing activities. Conversely, these are eligible under the Hungarian regime, where only designs are ineligible. Same goes to Luxembourg, where only formulas and copyrights other than software may not qualify for its IP box regime.
Another important consideration is the origin of the IP assets. In Cyprus, the eligible IP assets have to be internally developed and acquired, but in Belgium, they can also be licenced by third parties.
Similarly, Cyprus has certain limitations on where the R&D takes place for them to be eligible, but there are no such restrictions in Hungary, Luxembourg, France or the United Kingdom.
The scope of the qualifying revenue in Cyprus is the broadest amongst the compared jurisdictions. They include royalty, licensing fees, compensation income, trading profits and capital gains from the disposal of IP. However, it does not include income from patents, which is eligible in Belgium.
In summary, the choice of the most beneficial IP box regime is not to be made lightly as there are important differences which may be crucial depending on the structure of the newly incorporated business. Careful consideration of factors including (but not limited to) the eligibility criteria, the origin requirement, and qualifying revenue from IP assets should also be made holistically.
Although Cyprus is the most prominent destination for IP box regimes in Europe, it may not always be the optimal choice for your business. NBLO can provide valuable guidance to help you make the best decision for your newly incorporated company.
You can read more publications from the New Balkans Law Office at the links below.
Alternative Investment Funds as a Tool for Diversifying Investments
Bulgaria’s start-up visa: a route into EU markets
Benefits of Shareholders’ Agreements
How to prove my Source of Funds/Source of Wealth from crypto asset profits
Investor protection before the European Court of Human Rights