What Does It Cost to Move Software You Already Own into Cyprus?

The four costs, and when each one lands

Most founders arrive at this decision having priced one thing, which is what the company will pay for the software. That is rarely the largest number and it is never the only one.

Four costs attach to moving an intangible you already own into a Cyprus company. Two of them fall on you personally rather than on the company. Three of them are settled by decisions taken before the transfer happens, which is why the sequence matters more than the price.

• Value added tax on the transfer itself, which falls on you rather than on the company.
• The effect of the price on the nexus fraction, which reduces what the intellectual property regime is worth until qualifying development catches up.
• The part of the price that is written off nowhere, being whatever lands in goodwill.
• The valuation, which is a third party cost and is also what the first three are measured against.

Value added tax on the transfer

Anything supplied that is not a supply of goods is a supply of services. The assignment of a copyright in software is not a supply of goods, so it is a supply of services, and the standard rate applies to the value of the supply.

Whether a charge arises on any particular transfer is a question of fact about the transferor's own position at the time. It is not decided by the transaction being a single one, or a private one, or a small one.

Whether the charge is a real cash cost, as opposed to an amount accounted for and recovered, depends on the position of both parties at the time of the transfer. That is a question to settle before anything moves rather than afterwards, because it is not open to correction once the supply has been made.

What the price does to the nexus fraction

Under the intellectual property regime the deduction is limited by the nexus fraction, which measures what you spent developing the asset against everything spent on it.

The acquisition cost sits in overall expenditure, the denominator. It never counts as qualifying expenditure, so it cannot enter the numerator directly. It reaches the numerator only through the uplift, which is the lower of 30 percent of qualifying expenditure and the total of the acquisition cost and any related party research.

That cap is what makes the position recover rather than stay broken. Once qualifying expenditure grows to the point where 30 percent of it equals the acquisition cost, the uplift cancels the acquisition cost entirely and the fraction returns to one.

The standard the Regulations implement is explicit on the point.

Acquisitions include any transfer of rights regardless of whether a payment was actually made.

OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 - 2015 Final Report, OECD and G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, paragraph 52.

The same paragraph requires that where the transferor is a related party the arm’s length price is used to determine the acquisition cost, supported by documentation of that price and of the overall expenditure the transferor itself incurred. The Cyprus Regulations exclude acquisition cost from qualifying expenditure and include it in overall expenditure, without separately addressing a transfer made for no payment. The standard they implement does address it. So on a transfer between a founder and their own company the valuation is not paperwork that follows the decision, it is the figure that sets the denominator.

The fraction is measured cumulatively over the life of the asset rather than year by year, so development carried out after the transfer repairs the position for the asset as a whole and not only for the year in which it is spent.

The part of the price that buys nothing

Article 9(1)(λ) of the Income Tax Law allows expenditure on the acquisition or development of an intangible asset to be written off over its useful life, to a maximum of twenty years, and over twenty years where the life is indefinite. A person may claim all or part of that deduction in any year, and amounts granted but not claimed are spread over the period remaining.

The paragraph does not apply to goodwill. It says so expressly, excluding φήμη και πελατεία, εμπορική εύνοια from its scope.

Goodwill is also outside the intellectual property regime, which reaches patents, copyrighted software and other legally protected intangibles, and not marketing intangibles or the residual value of a business as a going concern.

So the two treatments point the same way. Price attributed to the copyright in the code is a qualifying asset and is written off. Price that lands in goodwill is neither. It produces no deduction and no qualifying profit, in any year.

Why the valuation is an allocation rather than a number

The three costs above are all measured against the same figure, and that figure is usually commissioned as one number for the business.

A single enterprise value leaves nothing to support an allocation between the copyright, the marks, the contracts and the residual. Where there is nothing to support the allocation, the part of the price that attracts no deduction and no qualifying profit is not a choice that was made. It is what is left after the parts that could be evidenced have been taken out.

The allocation is not a free choice in any event. It has to reflect the market value of what was transferred, and it is open to examination. But a valuation prepared component by component can be defended, and one prepared as a single figure gives the person preparing the tax computation nothing to work from.

Common questions