Tax minimization for IT-business through IP box: comparison of jurisdictions
One of the main reasons for business migration is the search for opportunities to minimize the tax burden. This issue is especially relevant for small and medium-sized businesses, startups with low margins.
A popular and convenient option for minimizing taxes for IT business companies is the IP box mode.
It should be noted that the “IP box” is not a universal name, but the established unwritten practice for the name of preferential tax regimes for people working in the field of intellectual property.
For the most part, the Cypriot authorities influenced this state of things, but there are other jurisdictions that want to attract IT business to the country, creating a favorable tax environment.
Among the countries that have become popular thanks to their IP box tax regimes are Cyprus, Poland, Georgia and Hungary. Let us examine the conditions and principles of tax incentives in each of them.
For IT companies in Cyprus in the IP box mode, 80% of qualifying profits from qualifying assets will be exempt from taxes. At the same time, the effective tax rate of taxation decreases from the standard 12.5% to 2.5%.
The right to minimize tax are companies that profit from the use of so-called qualified intangible assets.
Such assets must be bought, developed or used by a person in order to develop his activity (except for intellectual property related to marketing), or obtained as a result of research and development work.
In particular, these assets include:
Qualified profits are calculated according to a special formula and depend on the amount of expenses the company has for research and development.
According to the results of the reporting financial period, when determining the tax base, 80% of the total profit received from a qualifying intangible asset is related to deductible expenses. It should be noted that in the case of a significant expenditure part, only 20% of expenses can be carried forward to the next reporting periods.
However, it is important to remember that having a registered company without a physical presence in Cyprus is not enough. Today, requirements are being put forward for a substantial business presence, in particular, a real office, hired employees involved in the development, and use of a qualified intangible asset are required.
There is a similar special regime for IT business in Poland. Given the general trends in the requirements of banks for the economic connection of business with the country of registration, Poland can be considered as the most comfortable country for business migration due to economic indicators, cultural proximity and territorial location.
The preferential tax rate in Poland is 5%.
Like in Cyprus, there are a number of requirements that a company must fulfill in order to be able to use the preferential tax regime.
Firstly, the company must carry out research and development activities (qualified activities). Including - research activities carried out in a systematic manner, aimed at acquiring new knowledge and resources for the development of new applications (products).
In particular, this includes:
Secondly, the company must generate profits from qualified activities:
Profit calculation for tax purposes also takes place according to a special formula taking into account the coefficient.
Hungary is a fairly attractive jurisdiction even without the application of special tax regimes. The standard rate on the company's profit is 9%. An additional 2% municipal tax is also levied.
However, already small taxes can be reduced by applying the special IP mode. So, the municipal tax of 2% on royalties received can be reduced to 0%.
Income tax on the use of a qualified property will be reduced by 50% of the standard rate. Total tax on such profits will be only 4.5%.
From 2020, tax reform will come into force in Switzerland, which, among other things, will introduce a special patent box regime for companies that own patents and some other intellectual property rights. Swiss patent box provides for the exemption of 90% of qualified profits from tax.
At the same time, the software itself does not automatically fall under the patent box, and also cannot be patented separately. You can use the mode for software if it is part of a patented invention.
Another option to get tax benefits from owning software in Switzerland is to patent the software in another country and register intellectual property rights for a Swiss company.
Thus, despite the planned introduction of a preferential regime in Switzerland, its application so far seems rather limited.
A popular and convenient option for minimizing taxes for IT business companies is the IP box mode.
It should be noted that the “IP box” is not a universal name, but the established unwritten practice for the name of preferential tax regimes for people working in the field of intellectual property.
For the most part, the Cypriot authorities influenced this state of things, but there are other jurisdictions that want to attract IT business to the country, creating a favorable tax environment.
Among the countries that have become popular thanks to their IP box tax regimes are Cyprus, Poland, Georgia and Hungary. Let us examine the conditions and principles of tax incentives in each of them.
Cyprus
For IT companies in Cyprus in the IP box mode, 80% of qualifying profits from qualifying assets will be exempt from taxes. At the same time, the effective tax rate of taxation decreases from the standard 12.5% to 2.5%.
The right to minimize tax are companies that profit from the use of so-called qualified intangible assets.
Such assets must be bought, developed or used by a person in order to develop his activity (except for intellectual property related to marketing), or obtained as a result of research and development work.
In particular, these assets include:
- patents;
- computer software;
- Utility models, intellectual property objects that provide protection of plants and genetic material, designations of medicines for the treatment of rare diseases.
Qualified profits are calculated according to a special formula and depend on the amount of expenses the company has for research and development.
According to the results of the reporting financial period, when determining the tax base, 80% of the total profit received from a qualifying intangible asset is related to deductible expenses. It should be noted that in the case of a significant expenditure part, only 20% of expenses can be carried forward to the next reporting periods.
However, it is important to remember that having a registered company without a physical presence in Cyprus is not enough. Today, requirements are being put forward for a substantial business presence, in particular, a real office, hired employees involved in the development, and use of a qualified intangible asset are required.
Poland
There is a similar special regime for IT business in Poland. Given the general trends in the requirements of banks for the economic connection of business with the country of registration, Poland can be considered as the most comfortable country for business migration due to economic indicators, cultural proximity and territorial location.
The preferential tax rate in Poland is 5%.
Like in Cyprus, there are a number of requirements that a company must fulfill in order to be able to use the preferential tax regime.
Firstly, the company must carry out research and development activities (qualified activities). Including - research activities carried out in a systematic manner, aimed at acquiring new knowledge and resources for the development of new applications (products).
In particular, this includes:
- The right to a patent (invention);
- The right to a registered industrial design;
- The right to a registered integrated circuit;
- The exclusive right to a variety of plants;
- The right to breed animals;
- The right to a computer program.
Secondly, the company must generate profits from qualified activities:
- From the proceeds of a license agreement in respect of a qualified property right;
- From the sale of qualified property rights;
- From compensation for violation of the right to use a qualified property right.
Profit calculation for tax purposes also takes place according to a special formula taking into account the coefficient.
Hungary
Hungary is a fairly attractive jurisdiction even without the application of special tax regimes. The standard rate on the company's profit is 9%. An additional 2% municipal tax is also levied.
However, already small taxes can be reduced by applying the special IP mode. So, the municipal tax of 2% on royalties received can be reduced to 0%.
Income tax on the use of a qualified property will be reduced by 50% of the standard rate. Total tax on such profits will be only 4.5%.
Switzerland
From 2020, tax reform will come into force in Switzerland, which, among other things, will introduce a special patent box regime for companies that own patents and some other intellectual property rights. Swiss patent box provides for the exemption of 90% of qualified profits from tax.
At the same time, the software itself does not automatically fall under the patent box, and also cannot be patented separately. You can use the mode for software if it is part of a patented invention.
Another option to get tax benefits from owning software in Switzerland is to patent the software in another country and register intellectual property rights for a Swiss company.
Thus, despite the planned introduction of a preferential regime in Switzerland, its application so far seems rather limited.
In general, all of the listed jurisdictions are convenient and attractive for a beginner IT business. Understanding in detail the planned activities, predicting the development of IT companies and cash flows, you can easily choose the best option for the successful establishment and development of your business.
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