Royalties are the payments of license fees or commissions by one individual or entity to another for the use of Intellectual Property (IP). IP can take several forms:
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copyrights which can include literary works, dramatic works, musical works, scientific works, artistic works, sound recordings, films, broadcasts, published editions, databases, publications, software programs
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patented inventions
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trademarks (and service marks), designs and models that are used or applied on products
The above is a non-exhaustive list.
Registrable IPs need not be registered in Cyprus to benefit from IP regime.
The aim is to generate the income arising from these rights in the most tax efficient manner possible. The ideal candidate for royalty routing is a client who has a new IP right, when there is little difference between the fiscal book value and the real value of that right and it can be transferred to an offshore company at minimal value. Once the intellectual property rights are vested in this company they are then licensed to other, usually onshore, intermediary corporations.
The introduction of the new IP “box regime” in 2012, means that there is no need for the use of the traditional offshore company as the ultimate parent company as the IP owner and the Cyprus entity being the collection agent.
Ideal IP location
IP can be one of the most valuable assets of an organization. Choosing the right location for the centralization and management of IP is a very important strategic business decision. The ideal location to establish an IP structure is one that can serve the organization’s business strategies/model, safeguard and protect its IP and contribute to its tax optimization.
Cyprus offers an efficient IP tax regime coupled with the protection afforded by EU member states and by the signatories of all major IP treaties and protocols.
Benefits of Cyprus IP
The new provisions provide exemptions from tax of income related to IP. More specifically:
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80 percent of worldwide royalty income generated from IP owned by Cypriot resident companies (net of any direct expenses) is exempt from income tax
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80 percent of profit generated from the disposal of IP owned by Cypriot resident companies (net of any direct expenses) is exempt from income tax
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effective tax rate of 2,5 percent or less
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any expenditure of a capital nature for the acquisition or development of IP is claimed a tax deduction in the year in which it was incurred and the immediate four following years on a straight-line
All the above exemptions are also available for IPs acquired or developed before January 2012.
In addition:
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no withholding taxes on payment of royalties when distributed out of Cyprus, provided that the holder is not a Cyprus resident and the royalty is used outside of Cyprus
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tax is only paid on the licence fee retained by the Cyprus company
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Cyprus has an extensive worldwide network of double tax treaties
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EU Directive on Interest and Royalties providing for nil withholding taxes between EU countries, applying also to Cyprus
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Cyprus corporate tax rate is at 12,5 percent, the lowest within EU
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the licence fee retained by the onshore intermediary company will typically be 5 percent
Example
Assume that a Cyprus IP company licenses its IP to its operating foreign Companies and in return it receives royalty income of €100.000 per year.
Structure is depicted below:
The expected annual tax for the Cyprus IP Company will be as follows:
|
|
€ |
|
Annual royalty income |
100.000 |
|
Direct expenses (say) |
(20.000)
_______ |
|
Net income |
80.000 |
|
80% deemed deduction |
(64.000)
_______ |
|
Taxable income |
16.000
======= |
|
@ 12,5% Income tax |
2.000 |
|
Effective tax rate |
2% |
* Under the majority of Cyprus double tax treaties the withholding tax on royalty payment is nil
For more information on Cyprus' IP's and Royalties please contact us.
More information:
Do you want to establish a company in Cyprus? Our
Cyprus company formation page explains it all.
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Cyprus bank account opening and
Eurobank Cyprus online banking.