Israeli and foreign multinational tech companies are bruised by the efforts of
the Israel Tax Authority, in court and outside, to tax “trapped profits” from
past Israeli tax breaks, if the profits are invested outside Israel. A country
that makes things easier is Cyprus. In May 2012, Cyprus passed an amendment to
reduce its 10 percent corporate income-tax rate for tech companies. Cyprus and
Israel are friendly neighbors, similar to the United States and
Cyprus amendment The Cypriot amendment includes the introduction
of a new intellectual-property-rights box (“IP box”) in Cyprus. The new regime,
which is effective from January 1, 2012, can now compete with any other IP-box
The regime will apply to all categories of intellectual
property acquired or developed by a Cyprus resident company post-January 1,
2012. All expenditure incurred and income received in relation to the intangible
property will be captured by the regime. This includes the cost of acquisition
or development of the asset, the income received from the use of the intangible
assets and any profit on disposal of the IP rights.
intellectual-property rights through Cyprus can achieve an effective tax rate of
less than 2%. And Cyprus does not tax dividends paid to non-Cyprus-resident
When comparing this to the other IP regimes in Israel or
the EU, this is by far the lowest rate achievable.
In Israel, by
contrast, “preferred enterprises” will generally pay 6%-12.5% corporate income
tax, and dividends are taxed at 15% subject to any tax treaty.
acquisition or development Prior to the amendments made, any cost of acquisition
or cost of the development of IP rights by a Cyprus company would need to be
amortized over the estimated useful life of the IP. For example, if the life of
the IP was deemed to be 25 years, a writing-down allowance (depreciation) of 4%
would have been given on a straight-line basis per annum.
The new regime
offers a far more beneficial amortization period, and the costs can now be
amortized over a five-year period, resulting in a writing-down allowance of 20%
The change in the accelerated writing-down allowances should
immediately result in huge tax benefits for the acquiring company, in particular
where the asset is of substantial value.
Royalty income Where the Cyprus
resident company has granted licenses to overseas licensees and receives
royalties from the exploitation of the IP rights, the income will be taxed at
the standard corporate income-tax rate of 10%. However, under the new regime,
80% of the royalties received will be exempt from Cyprus tax after deducting any
directly attributable expenses incurred on the amounts received.
further general expenses can also be deducted from the profit but are not
subject to the 80% rule.
For example, if a Cyprus company derives royalty
income of 1 million euros and direct expenses of, say, 20,000 euros, there will
be net royalty income of 980,000 euros. Of this, 80% ( 784,000 euros in this
example) is exempt, leaving gross taxable income of 196,000 euros. From this,
other general expenses of, say, 6,000 euros may be deducted, leaving only
190,000 euros liable to the 10% corporate income tax in Cyprus. So the tax will
be 19,000 euros.
This example shows that an effective tax rate of 1.9%
may be achieved from the holding and exploitation of intellectual-property
rights in Cyprus. The rule is also applicable to any compensation received in
Cyprus for the misuse of such property.
Profit on disposal Under the new
Cyprus IP-box regime, any profit on disposal of the acquired or developed
intellectual property is eligible for further tax benefits.
deduction of 80% will be available on the net profit on disposal (gross sale
price less cost of purchase and amortization deductions claimed in prior
The remaining profit will be taxable at the standard corporate
income tax rate of 10%.
Planning There are further tax-planning
opportunities that will result in a tax-free disposal. This can be achievable
if, as an alternative to the disposal of the IP directly, the shareholder of the
Cyprus company disposes of the shares in the Cyprus company that holds the IP
rights. Any gains arising from the disposal of shares are totally exempt in
Cyprus, providing that the company in which the shares are being disposed of
does not contain any immovable property that is situated in Cyprus.
benefits Any distributions made from a Cyprus company to its overseas
shareholder would be fully exempt from tax in Cyprus.
Cyprus is an EU
member state and has an extensive tax-treaty network with other
There is no tax treaty between Israel and Cyprus, but
negotiations about such a treaty are reported to have begun.
taxation Israeli residents who use a Cyprus company should check the interaction
between Cyprus and Israeli taxation. Israeli residents are taxable on their
worldwide income and gains. Israel has rules for granting a foreign tax credit
against Israeli taxes arising. Any Cyprus company should have substance
(activities, offices, personnel, etc.) and not be controlled and managed in
Israel; otherwise, it may be deemed to be resident and taxable in
Israel also has rules for taxing distributed and undistributed
profits of certain foreign service companies owned 75% or more by Israeli
residents and passive-controlled foreign investment corporations. Nevertheless,
advance tax planning can sometimes remove or defer such taxation until the
relevant income is received by Israeli residents.
Cyprus-Israel structure can be beneficial from the tax perspective for
multinational tech groups and for companies in other sectors.
consult experienced tax advisers in each country at an early stage in specific
C.Theodorou@bakertillyklitou.com firstname.lastname@example.org Chris Theodorou is a
tax manager at Baker Tilly in Nicosia, Cyprus. Leon Harris is a certified public
accountant and tax specialist at Harris Consulting & Tax Ltd. in Ramat Gan.