Changes on the taxation of intangible assets

On 17 July 2020, the Cypriot House of Representatives approved a bill amending the Income Tax Law introducing changes with respect to the taxation of intangible assets. The changes relate to all types of capital-nature intangible assets, other than Intellectual Property (“IP”) within the old Cyprus IP box and goodwill. The relevant changes shall apply once the bill is published in the Official Gazette of Cyprus with effect as from 1 January 2020.

The amended provisions are summarized below.

No obligation to prepare a balancing statement

Under the existing provisions, upon the disposal of an intangible asset, a taxpayer has the obligation to prepare a balancing statement. The balancing statement compares the sale proceeds of the disposal and the tax written down value of the intangible asset.

When the sale proceeds of the disposal are equal or exceed the tax written down value of the intangible, a balancing addition is made to the taxable profits of the year (i.e. an increase of the taxable profits). The said balancing addition is restricted to the accumulated capital allowances (tax amortization) claimed prior to the disposal. This effectively means that any accumulated amortization claimed on an intangible asset is clawed back and taxed in the year of disposal.

As of 1 January 2020, the obligation to prepare a balancing statement upon a transfer/sale of an intangible asset is abolished.

Carryforward of unused tax depreciation

Under the existing provisions, any expenditure incurred for the acquisition or development of an intangible asset which is of a capital nature is capitalized and amortized in a reasonable manner (usually straight-line basis) according to acceptable accounting standards, with a maximum period of 20 years. Tax amortization is annually elective in that the taxpayer may annually take anything between zero and the full eligible amount. The current provisions are silent as to whether the unused tax amortization can be carried forward and be used in subsequent tax years.

The amended law provides that any unused tax depreciation and the right to claim such depreciation can be carried forward. The carried-forward tax depreciation may be claimed by the taxpayer as additional tax depreciation during the remaining useful life of the asset.

The above change in the law is effective from 1 January 2020.

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We are at your disposal to discuss how the above changes can positively affect your existing or contemplated IP structure.

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