Cyprus IP Box: How the 80% Allowance Works

Worked example: where the 3% comes from

The allowance is a notional deduction of 80% of qualifying profit. Tax at 15% on the remaining 20% gives 3%. The illustrative company below has EUR 200,000 of net profit from its own copyrighted software, and everything else is ignored.

The right-hand column is the one to plan for. Few companies qualify in full, and every point lost on the qualifying share has a real cost. The 60% is only an assumption for this example, and your own fraction comes from your R&D records.

What decides your qualifying share?

Mainly who did the work. Cyprus uses the modified nexus approach agreed internationally under OECD BEPS Action 5, and it links the benefit to the R&D behind the asset. PwC's summary explains the effect: the more R&D the taxpayer performs itself, the higher the fraction. Work done through a taxable foreign permanent establishment, or outsourced to an unrelated third party, counts in your favour.

That gives you a practical rule for structuring development.

So a founder who develops software personally, then sells it to a new Cyprus company, may find the fraction disappointing. The same applies to a group that builds in one country and owns the IP in Cyprus. Decide where development happens before you decide where IP sits.

Which assets qualify?

The list is narrower than "intellectual property" suggests.

The size limits for that fourth line are annual IP revenue of EUR 7.5 million or less for the taxpayer, and group revenue of EUR 50 million or less, each measured as a five-year average. The IP can be legally or economically owned.

What counts as qualifying profit?

Five income types can qualify:

• Royalties and other amounts for the use of qualifying IP.
• Licence fees for exploiting it.
• Insurance or compensation amounts related to it.
• Trading income from selling it.
• IP income embedded in the sale of products or services, or in the use of processes, directly related to the IP.

That last line matters for software and SaaS companies, since the IP is rarely licensed on its own. It is also where the records have to be good. You will need to show which revenue relates to the qualifying asset, what it cost, and how you calculated the embedded portion.

Royalty income outside the regime is simply taxed at 15% after allowable expenses. If the IP cost you money to acquire or develop, capital expenditure can be written off over its useful life, up to 20 years.

IP box or R&D allowance?

You cannot combine them. For 2022 to 2030, an extra 20% allowance applies on R&D spending by businesses that hold the economic ownership of the resulting intangible. It cannot be combined with the 80% nexus allowance, and it can be waived.

On illustrative R&D of EUR 100,000, the extra allowance is EUR 20,000, worth EUR 3,000 of tax at 15%. On the example at the top of this page, the IP box saves EUR 14,400 to EUR 24,000. So a profitable software company with real IP income will usually look at the IP box first. An early-stage company still spending on development, with little IP income, may find the R&D allowance more useful for now. Model both, year by year.

Is it worth setting up?

Use this as a filter before you pay for advice.

It is likely to be worth exploring if you own patents or copyrighted software, your team develops them in Cyprus or through unrelated contractors, and IP income is a large part of your profit.

It is unlikely to help if your value is mainly your brand, you run an agency or a services business with no owned IP, or your development sits in a related company abroad.

The allowance only has value once there is IP income. Software companies usually sell across borders, so plan your international SEO strategy alongside the structure.

Records are the hidden cost. Start tracking R&D by project from day one, with staff time, contractor invoices and the asset each cost relates to. Reconstructing that history later is hard. If you are still deciding where to base the company, start with how to register a company in Cyprus and the corporate tax rate guide. Software groups should also read about the holding company question.

Take your IP and your development plan to a Cyprus lawyer, who can check whether the company should be set up with the IP box in mind, and have your tax adviser model the numbers. Our company launch service covers the website and search side.