In short
- Effective rate in 2026: 15% × 20% = 3% when all the profit qualifies. Until 2025 the figure was 2.5%.
- Qualifying: patents, software, utility models. Never: trademarks, brands and other marketing rights.
- Buying IP, or paying a sister company to develop it, lowers the share of profit that qualifies.
- The company keeps books of income and costs for each asset and claims the deduction in its return.
In this guide
What is the Cyprus IP Box?
An IP box is a tax rule that taxes profit from intellectual property at a lower rate than other profit. In Cyprus it works as a deduction: Article 9 of the Income Tax Law treats 80% of the qualifying profit from a qualifying intangible asset as an expense. The regime has applied since 1 July 2016 and follows the nexus approach of the OECD, which ties the relief to the research and development the taxpayer paid for.
It is open to a company that is tax resident in Cyprus, to the Cyprus branch of a foreign company, and to a foreign branch that is taxed in Cyprus. The detailed rules are in the Income Tax (Intangible Assets) Regulations of 2016, K.D.P. 336/2016.
We compute the deduction and file the return as part of tax services in Cyprus.
How the 3% effective rate is computed in 2026
Corporate tax is 15% from 1 January 2026. When the whole profit from an asset qualifies, 80% of it is deducted and 20% is taxed: 15% × 20% = 3%. Under the 12.5% rate that applied until 31 December 2025 the same sum gave 2.5%.
3% is the floor. The deduction applies to the qualifying profit, which is the profit multiplied by the nexus fraction explained below. A fraction under 100% leaves a larger part of the profit taxed at the full rate.
| Nexus fraction | Share of profit taxed | Effective rate in 2026 |
|---|---|---|
| 100% | 20% | 3% |
| 75% | 40% | 6% |
| 50% | 60% | 9% |
| 25% | 80% | 12% |
| 0% | 100% | 15% |
Which assets qualify for the Cyprus IP Box and which never do
A qualifying intangible asset is intellectual property that the company acquired, developed or exploited in its business and that results from research and development. Economic ownership is enough: the company does not have to hold the legal title.
- Patents, as the Patents Law defines them
- Computer software
- Utility models, rights that protect plants and genetic material, orphan drug designations and extensions of patent protection
- Other assets that are non-obvious, useful and novel, certified as such by a competent authority in Cyprus or abroad. This group is for smaller taxpayers. Gross income from all intangible assets is €7.5 million a year at most, and for a group the worldwide turnover is €50 million at most, both as five-year averages
Business names, brands, trademarks, image rights and other rights used to market products and services do not qualify, whatever was spent on them.
Which income counts: royalties, licences and embedded income
The starting figure is the overall income from the asset: the gross income of the tax year less the direct costs of earning it. The regulations name five kinds of income.
- Royalties and other amounts for the use of the asset
- Amounts for granting a licence to exploit it
- Insurance proceeds and compensation that relate to the asset
- Income from the sale of the asset, except gains of a capital nature
- Embedded income: the part of the price of a product, a service or a process that comes from the asset
Embedded income is the route for software sold by subscription. A subscription paid by a customer is not a royalty, and the regulations still count the part of it that the software earns. The Tax Department's circular 2017/04 is devoted to embedded income.
Direct costs include the yearly write-off of the cost of the asset, which is spread over its useful life up to 20 years, and the notional interest deduction that relates to it.
The nexus formula: how much of the profit qualifies
Qualifying profit = overall income × (qualifying expenditure + uplift expenditure) ÷ overall expenditure. The three kinds of expenditure are counted for the asset across all tax years, at the time the money is spent.
| Term | What goes in |
|---|---|
| Qualifying expenditure | Research and development spent wholly on the asset: wages and salaries, direct costs, overheads of the premises used for R&D, supplies, and work outsourced to unrelated parties |
| Left out of it | The price paid to acquire the asset, interest, the cost of land and buildings, amounts paid to related parties for R&D, and costs that cannot be tied to the asset |
| Uplift expenditure | The lower of 30% of the qualifying expenditure and the sum of the acquisition cost and the R&D outsourced to related parties |
| Overall expenditure | The qualifying expenditure plus the acquisition cost and the R&D outsourced to related parties |
A company that builds the asset with its own team or with independent contractors has a fraction of 100%. Each euro paid to buy the asset, or to a group company for development, enters the lower line of the fraction in full and the upper line up to the 30% uplift.
We do this for you Cyprus corporate tax services from €290 a month with accounting
Worked example: €500,000 of software profit in 2026
A Cyprus company sells subscriptions to software it owns. Its overall income from the software in 2026 is €500,000. To date it has spent €600,000 on its own developers and independent contractors, €100,000 on a module bought from a third party and €300,000 on development by a sister company.
| Step | Calculation | Result |
|---|---|---|
| Qualifying expenditure | Own team and independent contractors | €600,000 |
| Overall expenditure | €600,000 + €100,000 + €300,000 | €1,000,000 |
| Uplift expenditure | Lower of 30% of €600,000 and €400,000 | €180,000 |
| Nexus fraction | €780,000 ÷ €1,000,000 | 78% |
| Qualifying profit | 78% of €500,000 | €390,000 |
| Deduction | 80% of €390,000 | €312,000 |
| Taxable profit | €500,000 less €312,000 | €188,000 |
| Corporate tax | 15% of €188,000 | €28,200 |
The effective rate is 5.64%. Without the IP Box the tax would be €75,000. Had the company done all the development itself, the fraction would be 100%, the taxable profit €100,000 and the tax €15,000, which is 3%.
How a company claims the IP Box
- Keep accounting books and records of income and expenses for each intangible asset. The regulations make this a duty of every company that claims the deduction.
- Record development spending by asset and by kind from the first year: own staff, independent contractors, related parties, acquisitions.
- Compute the overall income, the nexus fraction and the deduction for each asset when the year closes.
- Claim the deduction in the company's income tax return, form T.D.4. For any year the company may give up the deduction in whole or in part.
- Price licences and development services between group companies as between independent parties. From 2026 a transfer pricing file is required once such services and licences pass €2.5 million a year.
- Where the treatment is uncertain, apply to the Tax Department for a tax ruling on form T.D.219.
When we keep the books, the records by asset are part of accounting in Cyprus.
What changed for the IP Box in 2026
- The corporate tax rate rose from 12.5% to 15%, so the lowest effective rate moved from 2.5% to 3%. The rules of the regime itself were left as they were.
- The extra 20% deduction for research and development spending was extended to 2030. It is not given for spending on an asset to which the IP Box has been applied in any year, so a company chooses one of the two reliefs for each asset.
- Tax losses are carried forward for seven years, up from five.
- A company incorporated in Cyprus is tax resident there by default, unless a double tax treaty provides otherwise.
The guide to Cyprus corporate tax covers the rest of the reform.
Who the Cyprus IP Box suits
The regime rewards a company that develops its own software or patents and pays for the work itself, through employees or independent contractors. It gives little to a company whose income comes from a brand, to one that bought finished IP from a related party, and to one whose development is done by sister companies. Groups with revenue of €750 million or more are also subject to the minimum tax of 15%.
Profit taxed under the IP Box is distributed like any other, and the guide on dividends in Cyprus shows what reaches the owner. A new company for the asset is set up through company formation in Cyprus, and each year we file the tax return of the Cyprus company with the claim in it.
