Protection of innovation: The Commercial Reality Aspect

Nicholas Ktenas & Co LLC > News > Protection of innovation: The Commercial Reality Aspect

What do Skype, Facebook, lung medicine “Pulmicort” and a pacemaker have in common? They are all the result of research and innovation. Moreover, they represent items of protected intellectual property (“IP”). Innovation is at the heart of world development and its preservation cannot be overemphasized. In the words of a US congressman Howard Berman, protection of intellectual property in the digital age can go as far as represent ‘an economic stimulus’. Cyprus offers a comprehensive intellectual property protection system. Additionally, following the amendments to the taxation of income deriving from the use of IP rights in May 2012, Cyprus now also offers a wealth of opportunity for cross-border holding and utilization of such rights.

Like its intangible nature, what constitutes intellectual property can be difficult to define. As per European legislation guidelines, intellectual property can be divided into the following two categories:

  1. Industrial property, which includes patents, trademarks, service marks, trade names and industrial designs, and
  2. Copyright

Depending on its category, intellectual property can be protected in Cyprus in accordance with the applicable laws. In particular, the following three laws offer protection to those rights that can also benefit from the favourable IP tax regime:

  1. The Patents Law, 16(1)/98, as amended
  2. The Trade Marks Law CAP. 268, as amended
  3. Intellectual Property Rights Law 1976, as amended

The level of intellectual property protection offered in Cyprus extends well beyond the territorial boundaries of the island. This is achieved through the International and European Conventions which Cyprus is a signatory to and which have been transposed into local legislation over the years. Accordingly, protection of intellectual property can be accomplished in Cyprus not only at a national level but also at an international and European level as well.

The legal protection of innovation is an important step, but in commercial reality it is only the first step towards the successful business exploitation of innovation. The second and equally important step is to ensure that any proceeds generated by the IP rights, enjoy the advantages of an entrepreneur-friendly tax regime.

To this end, Cyprus offers a number of tax incentives and exemptions aimed at increasing the investments in IP through the island. The amendments to the Cyprus income tax law are valid since January 2012 and are applicable to any expenditure for the acquisition or development of intangible assets, incurred by a person carrying on a business.

In summary the IP regime offers the following benefits:

  • An 80% exemption on royalty income and capital gains upon disposal of IP subject to conditions;
  • No recapture system for previously generated losses – losses can be carried forward indefinitely;
  • Gross IP income reduced by expenses incurred for the production of IP income;
  • Competitive amortization provisions over a 5 year period;
  • Wide range of qualifying IP rights;
  • Effective Tax rate of 2.5% or less.

The recent developments to the IP tax regime represent a promising addition to an existing investor-attractive and business-oriented tax regime. Cross-border IP transactions via Cyprus can enjoy keynote benefits, such as withholding tax optimization on dividends, interest and royalties, the absence of any thin capitalization rules, the unrestricted access to EU Directives as well as the extensive Double Tax Treaty network Cyprus has already with almost 50 countries.

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