On 17 July 2020, a bill amending the Income Tax Law was approved by the Cyprus Parliament, introducing a number of changes concerning the tax treatment of intangible assets.
The changes are intended to simplify and clarify the relevant legislation and provide increased flexibility to taxpayers.
The Income Tax Law provides that any expenditure incurred for the acquisition or development of an intangible asset, incurred by a person carrying on a business and for the benefit of that business, is deductible for Income Tax/Corporation Tax purposes.
Under the existing provisions, a taxpayer has an obligation to prepare a so-called “Balancing Statement” in the event of a sale of an intangible asset. This statement presents, on one hand, the acquisition cost of the asset minus any depreciation (termed as “capital allowances”) claimed over the years and on the other hand the disposal proceeds, leading to a balancing addition or balancing deduction. This effectively means that any cumulative depreciation claimed may be clawed back and taxed in the year of disposal.
Based on the amendments voted, as from 1 January 2020, the obligation to prepare a Balancing Statement upon a disposal of an intangible asset is abolished. This means that no balancing addition or balancing deduction would be included in a taxpayer’s taxable income in the year of disposal.
Under the existing provisions, any expenditure incurred for the acquisition or development of an intangible asset which is of a capital nature is claimed (through capital allowances) as a deduction from taxable income over the useful life of that asset with a maximum period of 20 years.
Although a taxpayer has the option not to claim capital allowances in a particular tax year, the Income Tax Law is silent as to whether the unused amount can be carried forward and be used in subsequent years.
Following the amendments, as from 1 January 2020, any capital allowances that have not been claimed in a year are claimed over the remaining useful life of the asset. This means that the remaining value (initial cost minus total capital allowances claimed) of the asset at the beginning of each year will be re-distributed over the remaining useful life of the intangible.
The amended provisions are expected to have a positive impact on companies engaged in ownership and/or commercial exploitation of intangible assets. The abolition of the balancing statement means that any gain of a capital nature realised upon the disposal of such assets is exempt from tax. Furthermore, the amended provisions concerning capital allowances provide certainty and clarity that any deduction not claimed in a year can be carried forward and be used in the following years.