Decision
Will My Company Reach a Nexus Fraction of One?
Will My Company Reach a Nexus Fraction of One?: short answer
It depends on who funded the development and whether they are connected to the company, not on where they sat. Unconnected employees and arm's length contractors count in full, anywhere. Acquisition cost, connected party development and, on our reading, a founder's own salary do not. Five companies with the same spend pay between 3 and 12.4 percent.
Reviewed by Doviandi Limited, licensed by ICPAC as an administrative service provider, certificate E645/F/2014.
| In qualifying expenditure | Wages, direct costs, facility overheads, supplies, and research outsourced to non-connected persons, wherever located |
|---|---|
| Not in qualifying expenditure | Acquisition cost, interest, immovable property, research paid to a connected person, and costs not traceable to a specific asset |
| Added to overall expenditure | Only two of those five. Acquisition cost and connected party research |
| A founder's own salary | Treated by Doviandi as a connected party cost, outside qualifying expenditure. A considered position, not settled law |
| Uplift | The lower of 30 percent of qualifying expenditure and the total non-qualifying spend |
| Cap | One. The uplift cannot take the fraction above it |
| Effective rate at a fraction of one | 3 percent from 1 January 2026 |
| Effective rate formula | 15 percent multiplied by one minus 0.8 times the fraction |
The fraction is set by decisions about hiring, contracting and who owns the code, all of which are usually taken before anyone asks about tax. By the time the first return is due the number is already fixed by spending that has happened.
The fraction is a ratio of spending, and it decides the rate
The Cyprus IP Box gives an 80 percent deduction on qualifying profit. Qualifying profit is overall income multiplied by the nexus fraction, so the fraction is applied first and the deduction second. Reversing those two steps is the most common error in the regime.
The fraction is qualifying expenditure plus uplift, over overall expenditure, capped at one. Regulation 4(2) of the Income Tax (Intangible Assets) Regulations 2016 draws two separate lines there, and conflating them is the second most common error after reversing the deduction and the fraction.
The first line is what qualifies. Qualifying expenditure is research and development incurred wholly and exclusively for developing, improving or creating the asset and directly related to it. The Regulation lists wages and salaries, direct costs, overheads on facilities used for research and development, supplies, and research and development outsourced to non-connected persons. Five things are excluded from it:
- the cost of acquiring the asset
- interest paid or payable
- the cost of acquiring or erecting immovable property
- amounts paid or payable, directly or indirectly, to a connected person for carrying out research and development, whether or not under a cost-sharing agreement
- any cost that cannot be shown to relate directly to a specific qualifying asset
The second line is what enters the denominator, and it reaches only two of those five. Overall expenditure is qualifying expenditure plus acquisition cost plus connected party research. Interest, immovable property and untraceable costs leave the formula altogether rather than dragging the fraction down.
One more definition decides the size of the prize. Overall income is the gross income arising from the asset in the tax year reduced by the direct costs of earning it, so the figure that enters the formula is already net of those costs and is not turnover.
Collapsing the steps gives the rate directly:
Effective rate = 15 percent × (1 − 0.8 × nexus fraction)
The five companies below each have 1,000,000 of overall income from a qualifying asset and each spend 600,000 developing it. Nothing else about them differs. They pay between 30,000 and 124,000 of tax.
Four companies, the same spend, four different rates
Worked example
A SaaS company employing its engineering team in Cyprus, none of whom holds shares. Overall income 1,000,000. Development: 600,000 of salaries and related costs for its own staff.
| Step | Amount |
|---|---|
| Qualifying expenditure | 600,000 |
| Non-qualifying expenditure | 0 |
| Uplift, lower of 30 percent of qualifying and non-qualifying | 0 |
| Overall expenditure | 600,000 |
| Nexus fraction | 1.00 |
| Qualifying profit | 1,000,000 |
| Deduction at 80 percent | 800,000 |
| Taxable profit | 200,000 |
| Tax at 15 percent | 30,000 |
| Effective rate | 3.0 percent |
Illustrative only. Figures are assumptions used to show the mechanics of the calculation, not a representation of any actual client outcome or of the result you would obtain.
Worked example
The same company, except the engineers are not employees. One technical lead who holds no shares is employed in Cyprus at 150,000, and 450,000 is paid to independent developers abroad who are not connected to the company or its shareholders.
| Step | Amount |
|---|---|
| Qualifying expenditure, own staff | 150,000 |
| Qualifying expenditure, unrelated contractors | 450,000 |
| Non-qualifying expenditure | 0 |
| Overall expenditure | 600,000 |
| Nexus fraction | 1.00 |
| Tax at 15 percent | 30,000 |
| Effective rate | 3.0 percent |
The outcome is identical to the first company. Research outsourced to non-connected persons counts in full, and Regulation 4 draws no distinction by the location of the contractor. What it tests is whether the party carrying out the work is connected, not where that party sits.
Illustrative only. Figures are assumptions used to show the mechanics of the calculation, not a representation of any actual client outcome or of the result you would obtain.
Worked example
A founder who wrote the software before incorporating. The company acquires the finished codebase from him for 400,000 and then spends 200,000 on its own staff continuing development.
| Step | Amount |
|---|---|
| Qualifying expenditure | 200,000 |
| Non-qualifying, cost of acquiring the asset | 400,000 |
| Uplift, lower of 60,000 and 400,000 | 60,000 |
| Overall expenditure | 600,000 |
| Nexus fraction | 0.4333 |
| Qualifying profit | 433,333 |
| Deduction at 80 percent | 346,667 |
| Taxable profit | 653,333 |
| Tax at 15 percent | 98,000 |
| Effective rate | 9.8 percent |
The 400,000 sits in the denominator and never in the numerator. The uplift returns 60,000 of it, because the uplift is capped at 30 percent of what did qualify.
Illustrative only. Figures are assumptions used to show the mechanics of the calculation, not a representation of any actual client outcome or of the result you would obtain.
Worked example
A group that develops through a connected company. The Cyprus entity employs one person at 100,000 and pays 500,000 to a sister company for the development work.
| Step | Amount |
|---|---|
| Qualifying expenditure | 100,000 |
| Non-qualifying, paid to a connected person | 500,000 |
| Uplift, lower of 30,000 and 500,000 | 30,000 |
| Overall expenditure | 600,000 |
| Nexus fraction | 0.2167 |
| Qualifying profit | 216,667 |
| Deduction at 80 percent | 173,333 |
| Taxable profit | 826,667 |
| Tax at 15 percent | 124,000 |
| Effective rate | 12.4 percent |
Illustrative only. Figures are assumptions used to show the mechanics of the calculation, not a representation of any actual client outcome or of the result you would obtain.
The fifth company, and the assumption the first four rest on
Every company above pays its own staff, and in every one of them those staff hold no shares. That assumption is doing more work than any figure on the page.
Doviandi treats a founder's salary as a payment to a connected person, and therefore outside qualifying expenditure. Regulation 4(2) admits wages and salaries in one limb and excludes amounts paid directly or indirectly to a connected person for carrying out research in another, and a founder who owns the company and writes the code answers to both. Connected person is not defined in the Regulations, so Regulation 2(2) takes the meaning from the Income Tax Law, where Article 33 turns on participation in the management, control or capital of an enterprise. A founder-shareholder who is also a director satisfies all three.
Worked example
A founder-led company. Two founder-shareholders write most of the code and are paid 450,000 between them. One employed developer who holds no shares is paid 150,000.
| Step | Amount |
|---|---|
| Qualifying expenditure, unconnected employee | 150,000 |
| Non-qualifying, paid to connected persons for research | 450,000 |
| Uplift, lower of 45,000 and 450,000 | 45,000 |
| Overall expenditure | 600,000 |
| Nexus fraction | 0.325 |
| Qualifying profit | 325,000 |
| Deduction at 80 percent | 260,000 |
| Taxable profit | 740,000 |
| Tax at 15 percent | 111,000 |
| Effective rate | 11.1 percent |
Identical code, identical revenue, identical 600,000 of spend as the first company. The entire difference is that the people writing the code own the company.
Illustrative only. Figures are assumptions used to show the mechanics of the calculation, not a representation of any actual client outcome or of the result you would obtain.
The five side by side
| Where the 600,000 went | Nexus fraction | Tax | Effective rate |
|---|---|---|---|
| Own employees in Cyprus | 1.00 | 30,000 | 3.0 percent |
| Unrelated contractors abroad | 1.00 | 30,000 | 3.0 percent |
| Buying the founder's existing code | 0.4333 | 98,000 | 9.8 percent |
| Founder-shareholders, plus one employee | 0.3250 | 111,000 | 11.1 percent |
| A connected group company | 0.2167 | 124,000 | 12.4 percent |
Same revenue, same spend, four times the tax between the best and the worst. The difference is not the quality of the software or the size of the team. It is whose money paid for the work and whether the person doing it was connected to the company.
What this means before the spending happens
Three consequences follow, and all of them are about sequence.
The fraction is cumulative and measured over the life of the asset, not annually. A company cannot repair a low fraction by hiring differently for one year. It moves the ratio only in proportion to new qualifying spend against a denominator that already contains the old non-qualifying spend.
Ownership changes do not move it. Transferring the asset, restructuring the group or relicensing the income leaves the fraction where it was, because the fraction measures historic expenditure rather than present ownership.
The decision that matters most is usually taken before anyone has asked about tax. Whether a founder assigns existing code to the company or is employed by it to continue writing it, whether the next engineer is hired or is given equity, and whether development is contracted at arm's length or routed through a group entity, are ordinary commercial decisions with a large and permanent effect on this number. Note that moving a founder from assignment to payroll does not, on our reading, move the spend into the numerator. Only an unconnected person's work does that.
Doviandi models the fraction against a company's actual engineering arrangements before the spending happens, and the Cyprus IP Box calculator runs the same arithmetic on your own figures.
Common questions
Do my developers have to be in Cyprus for the IP Box?
Not for the nexus fraction. Regulation 4(2) of K.D.P. 336/2016 includes research and development outsourced to non-connected persons in qualifying expenditure, and draws no distinction by the location of the contractor. What it excludes is amounts paid directly or indirectly to a connected person. Economic substance and management and control are separate questions with their own tests, and they are not answered by the fraction.
What happens if I transfer my existing software into the company?
The cost of acquiring the asset enters overall expenditure and never qualifying expenditure, so it reduces the fraction. The uplift returns part of it, capped at 30 percent of what did qualify, which means the uplift can never do more than partly offset non-qualifying spend. A company that acquires most of its asset and develops little of it afterwards will sit well below a fraction of one.
Can the uplift take the fraction to one?
No. The uplift is the lower of 30 percent of qualifying expenditure and the total of acquisition cost plus related-party research, and the fraction itself is capped at one. The uplift exists so that a company with some non-qualifying spend is not shut out of the regime entirely, not so that the non-qualifying spend can be cancelled.
Does paying a connected company at arm's length prices help?
Not for this purpose. Regulation 4(2) excludes amounts paid or payable, directly or indirectly, to a connected person for carrying out research and development, whether or not under a cost-sharing agreement. The exclusion turns on the relationship rather than on the price, so transfer pricing documentation supporting the charge does not bring the expenditure into the numerator.
Does my own salary count if I own the company?
On Doviandi's reading it does not. Regulation 4(2) of K.D.P. 336/2016 lists wages and salaries as qualifying expenditure but excludes amounts paid directly or indirectly to a connected person for carrying out research and development, and a founder who owns the company and writes the code falls within both. Connected person takes its meaning from Article 33 of the Income Tax Law, which turns on participation in management, control or capital. This is a considered position rather than settled law, and the contrary reading treats the exclusion as aimed at related party outsourcing rather than at payroll. Where a great deal turns on it, the way to settle it is an advance tax ruling before the spending happens.
Can the fraction be improved later?
Only going forward, and only in proportion. Qualifying expenditure enters the formula when it is incurred, and the measurement is cumulative over the life of the asset, so later qualifying spend dilutes rather than removes earlier non-qualifying spend. The practical consequence is that the cheapest time to influence the number is before the development is commissioned.
Technical definition
The nexus fraction is qualifying expenditure plus uplift expenditure, divided by overall expenditure, capped at one. Qualifying expenditure is research and development incurred wholly and exclusively for the asset, including wages and work outsourced to non-connected persons. Overall expenditure adds only the cost of acquiring the asset and research paid to connected persons.
Practical implications
Because the fraction is a ratio of cumulative spending rather than of revenue, it cannot be improved after the fact by restructuring ownership or by moving income. It moves only when the pattern of development spending changes, and then only going forward.
Common misconceptions
That development must happen in Cyprus to qualify. The test in Regulation 4 is whether the party carrying out the research is connected to the company, not where that party is located. Arm's length contractors abroad count in full. And that all payroll qualifies because the Regulation lists wages, when a founder who owns the company is also a connected person being paid to carry out research.