How to pay low taxes in Europe: IP-box preferential program in Cyprus

Cyprus is a European country offering attractive conditions for entrepreneurs and investors. Here are some of the lowest taxes in Europe. So, corporate tax is only 12.5%, and under the program of IP-box IT-companies can pay taxes at a rate of only 2.5%. However, super-preferential terms are only available to companies that produce an intellectual product developed in the country.

How to optimize business and pay low taxes in Europe: IP-box preferential program in Cyprus

Modern businesses operating in the global economy face constantly changing tax requirements. Many countries, especially in Europe, are introducing new tax policies and reforms that have a significant impact on companies. In such circumstances, entrepreneurs seek to find effective ways to optimize their business and reduce tax obligations, in order to increase their competitiveness and efficiently use the company’s resources. In this context, business and tax optimization becomes an integral part of a successful management strategy.

In many European countries, tax controls are increasing year by year and new legislation is being introduced to combat tax evasion and ensure more equitable sharing of the tax burden.

For example, in 2023 Europe experienced some changes in taxes. The VAT rates in the EU differ from country to country, although they are harmonized to some extent by the European Union.

The countries with the highest standard VAT rates are Hungary (27%), Croatia, Denmark and Sweden (all 25%). Luxembourg sets the lowest standard VAT rate at 16%, followed by Malta (18%), Cyprus, Germany and Romania (all 19%). The average standard VAT rate in the EU is 21%, which is six percentage points higher than the minimum standard VAT rate required by the EU regulation.

Also, European countries continue to use excess profit taxes — a one-off tax levied on a company or industry to finance consumer support measures when economic conditions result in large windfall profits. For example, on 30 September 2022, the Council of the European Union agreed to introduce a tax on excess profits at the EU level («solidarity fee» in EU terms) on fossil fuel companies.

Thus, business optimization and tax payments come to the fore. The question arises, how to pay taxes at low rates and in which of the European countries are they most advantageous?

Low taxes in Europe: the list of countries with the most favorable conditions for businesses

According to Wisevoter, Lithuania, Ireland and Hungary are the three countries with the most favorable conditions for small and medium-sized enterprises (SMEs) in Europe. They were ranked among the 10 countries that offer the lowest tax on business income in the European Union.

For example, Hungary has the lowest corporate income tax rate among OECD countries - 9%, but since 2024, Hungary has agreed to the global minimum tax of 15% in the EU, which will only work for corporations with annual income over 750 million euros. The profit tax for small and medium-sized enterprises will remain 9%.

It is followed by Lithuania - 15% of the standard tax rate on business profits. However, small companies and agricultural companies may apply a reduced business income tax rate of 0% or 5% if certain conditions are met.

Ireland and Cyprus — Corporate Tax Rate 12.5%.

In Ireland, resident companies are taxed on their global profits, and non-resident companies are taxed only on the profits of the Irish subsidiary or agency. At the same time, Finance Minister Pascal Donoghue also confirmed Ireland’s involvement at the OECD and EU level in establishing a minimum effective corporate tax rate of 15% for companies in the international group with incomes over 750 million euros.

In Cyprus, the standard corporate tax rate remains at 12.5%. In addition, resident companies in Cyprus may benefit from substantial tax relief and multiple tax deductions for the following types of income:

• Exclusion of tax on profits from the sale of securities.
• Exceptions to interest and dividend tax.
• Deletion of income tax from permanent establishments located abroad. In addition, any tax loss from permanent establishments abroad is deductible for the Cyprus company.

On average, European OECD countries now set a business income tax rate of 21.7%.

Limassol, Cyprus

Cyprus as a tax jurisdiction: what are the advantages for companies

Cyprus has been an attractive «haven» for many companies due to its tax system, which provides a number of advantages and preferential terms.

• Low tax rates.

Corporate tax on the island is only 12.5%, which is one of the lowest rates in Europe. This allows companies to significantly reduce their tax liabilities and increase profits.

• International double tax treaties (DTTs).

Cyprus is actively concluding double tax treaties with many countries around the world. Currently, 67 countries have signed such agreements. This protects companies from double taxation and creates favorable conditions for international business and investment.

• IP-box program.

The IP-box program allows companies to reduce the tax rate on intellectual property income to 2.5%. This encourages the emergence of innovative companies and promotes the development of intellectual property on the island.

• A favorable legal environment.

The country is under British legislation and has a favorable legal environment for businesses. Laws and regulations governing taxation are transparent and predictable. Companies can rely on a stable and reliable legal system.

• Developed infrastructure and financial services.

The island has well-developed infrastructure and highly qualified professionals in financial services. There are many banks, investment companies and audit firms that are ready to provide professional support and advice on tax matters.

Tax rates in Cyprus in 2023

The following tax rates apply in Cyprus in 2023:

• The standard corporate tax rate is 12.5%.
• VAT rate - 19%.
• Individual income tax varies according to income level and can range from 0% to 35%.

The rate for individual’s income is progressive and is formed depending on the amount of income:

Real estate tax rates in Cyprus in 2023 are also progressive, depend on the price of real estate and range from 0.6% to 1.5%:

IP-box preferential program: What is it and who’s eligible?

IP-box is a special program of tax benefits, which gives companies the opportunity to reduce the tax rate on income received from intellectual property. This means that if your company creates, develops, or uses patents, copyrights, or other types of intellectual property, you can participate in this program and pay significantly lower taxes.

The IP-box is suitable for innovative companies that are actively engaged in the development of new products, technologies or ideas. It can be a company in information technology, medicine, pharmacy, engineering and other sectors where intellectual property plays an important role.

IP-box allows such companies to reduce the tax rate on intellectual property income to the level of 2.5%. This means that most of the revenue remains in your company and you can invest it in further business development.

The rate is calculated on the basis of the formula: 80% of profits from qualified assets are exempt from taxation, and the remaining 20% are taxable at a rate of only 12.5%. This means that the total income tax rate can be kept to a minimum of only 2.5%.

This new taxation system stimulates entrepreneurship and attracts investment, making Cyprus an attractive jurisdiction for many companies and investors.

Protaras, Cyprus

How to pay 2.5% tax: conditions for companies

There are certain conditions to comply with the IP-box:

• Company registration in Cyprus in accordance with local legal requirements.
• Ownership and development of qualified assets.
• Generation of income from qualifying assets, since the main source of profit for a company should be the use and commercialization of these qualifying assets.
• Valuation and Declaration of Profit — The company must estimate its profit and declare it accordingly in accordance with Cyprus tax regulations.

Qualifying assets that can be considered when applying IP-box program in Cyprus are:

• Intellectual property related to inventions, new technologies or processes and holding a patent.
• Know-how — confidential information that is not patent or copyright, but has commercial value, such as production secrets, technological knowledge or business processes.
• Software, mobile applications and computer programs developed for use on various devices. They include applications for entertainment, management, education, communication and other areas.
• Useful models and intellectual property objects related to plants, genetic materials and orphaned medicines which are innovative developments in agriculture, medicine and biotechnology. These may include new plant varieties, genetically modified organisms, genetic codes, drugs for rare diseases and other related objects.

However, the IP-box program has some limitations. For example, not all intellectual products can be considered qualifying assets, moreover, there are certain conditions for calculating the tax rate depending on the degree of product development by the company. In an expert article about the conditions of the IP-box program in Cyprus from the investment company SPM Real Estate you can learn all the details and nuances.

Nicosia, Cyprus

Business in Cyprus: why investors from all over the world set up companies and buy real estate in Cyprus

More than 1,000 companies are registered in Cyprus every year, half of them are foreign. They are relocated businesses attracted to the island by mild tax conditions and a stable economy. In the country, there is an active development of new office buildings, and the housing stock is replenished, as the increasing number of the relocated workers creates a growing demand for real estate. This is another reason to buy property on the island both for business and for yourself — diversification of the portfolio with low-risk real estate investments.

There are several reasons for the growing demand:

• Tax benefits.

The country’s tax system offers low tax rates and a wide range of tax incentives, including incentives for foreign investors and dividends.

• Stable economy.

Cyprus has a stable economy based on a variety of industries such as tourism, finance, real estate and shipbuilding.

• Geographical location.

The island is located in a strategic location between Europe, Africa and Asia. Its geographical location makes it a convenient base for business and trade between continents.

• Life quality.

The country has a high quality of life with a comfortable climate, beautiful beaches, rich culture and friendly community. This attracts many investors who are looking not only for business opportunities, but also a pleasant environment for living.

• The European Union membership.

Cyprus has access to the EU’s domestic market and additional business benefits. This facilitates trade with other European countries and ensures high standards of law and regulation.

• Immigration programs.

Cyprus offers various programs for attracting investors and granting residence permits. For example, you can get permanent residence in Cyprus for investments in real estate, economy, shares. The country is very comfortable for life and business, and the process of obtaining permanent residence under the accelerated program takes about 2 months.

All these factors make the Mediterranean island an attractive destination for investors who seek to optimize their business opportunities and ensure a stable financial future. And while in other European countries there are «swings» in the tax sector, Cyprus remains a stable and quiet haven.