Tax mitigation for IT businesses through IP Box: comparing jurisdictions
22 July, 2019
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One of the main reasons for business migration is search for opportunities in order to minimize tax burden. This issue is especially pressing for small and medium businesses and low-margin startups.
A popular and convenient option for tax mitigation for IT companies is IP Box regime.
It should be noted that IP Box is not a universal term, but quite a fixed unspoken practice for preferential tax regimes for natural persons engaged in the intellectual property sector.
This situation has largely been influenced by the Cypriot authorities, but there are other jurisdictions seeking to attract IT businesses by creating a favorable tax environment.
Cyprus, Poland, Georgia, and Hungary are among the countries that have become popular thanks to their IP Box tax regimes. Conditions and principles of tax incentives in each of them are set below.
Cyprus
For IT companies in Cyprus operating under IP box regime, 80% of qualifying profits derived from qualifying assets will be exempt from tax. The effective tax rate is reduced from the standard 12.5% up to 2.5%.
Companies that generate profits from using so-called qualified intangible assets shall have the right to tax mitigation.
Such assets should be acquired, developed or used by the entity for the purpose of its business development (except for intellectual property related to marketing) or obtained through research and development.
In particular, such assets include the following:
• patents;
• computer software;
• utility models, intellectual property objects providing protection for plants and genetic material, designations of drugs for treatment of rare diseases.
Qualifying profits shall be calculated under special formula and shall depend on the company’s R&D expenses.
At the end of reporting financial period, when determining tax base, 80% of aggregate profit derived from qualifying intangible asset shall be attributed to deductible expenses. It should be noted that in case of significant expenses, only 20% of the expenses can be carried forward to subsequent reporting periods.
However, one should remember that having a registered company without a physical presence in Cyprus is not sufficient. Today there are requirements for substantial business presence, including a physical office and employees involved in development and use of qualifying intangible asset.
Poland
A similar special regime for IT businesses also exists in Poland. Given the general trend of banks requiring businesses to demonstrate economic ties to the country of incorporation, Poland can be treated as the most favorable country for business migration due to its economic indicators, cultural proximity, and geographical location with Ukraine.
Preferential tax rate in Poland makes up 5%.
Like in Cyprus, there are several requirements that a company should meet to qualify for preferential tax regime.
First, the company should conduct research and development activities (qualifying activities), including research activities to be carried out systematically, aimed at acquiring new knowledge and resources for development of new applications (products).
In particular, this includes the following:
1) Right to patent (invention);
2) Right to registered industrial design;
3) Right to registered integrated circuit;
4) Exclusive right to plant variety;
5) Right to animal breed;
6) Right to computer program.
Second, the company should generate profit from the following qualifying activities:
1) From revenue received under license agreement for qualifying property right;
2) From sale of the qualifying property right;
3) From reimbursement for violation of the right to use qualifying property right.
Profit for tax purposes is also calculated under special formula with regards to coefficient.
Hungary
Hungary is a fairly attractive jurisdiction even without special tax regimes. Standard corporate income tax rate makes up 9%. Additional 2% municipal tax is also levied.
However, such low taxes can be reduced by applying a special IP Box regime. For example, 2% municipal tax on royalties received can be reduced to 0%.
Tax on profits from the use of qualifying asset will be reduced by 50% of the standard rate. Aggregate tax on such profits will make up only 4.5%.
Switzerland
Since 2020, a tax reform will enter into force in Switzerland, which, inter alia, introduces a special patent box regime for companies holding patents and certain other intellectual property rights. The Swiss patent box provides tax exemption of 90% qualifying profits.
However, software itself does not automatically fall under the patent box, nor can it be patented separately. The software regime can be used if it is a part of patented invention.
Another option for obtaining tax benefits from owning software in Switzerland is to patent software in another country and to register intellectual property rights in the name of a Swiss company.
Therefore, despite the planned introduction of preferential regime in Switzerland, its application is quite limited today.
In general, all the listed jurisdictions are convenient and attractive for aspiring IT businesses. By understanding details of the planned activities and forecasting development of IT companies and cash flows, one can easily choose the best option for successful establishment and growth of its own business.
Specially for ain.ua
