Cyprus as a Royalty Jurisdiction
Securing your intellectual property (IP) and benefiting from the Cyprus IP tax regime.
|Published on: 06 October 2015|
Intellectual Property (IP) can be one of the most valuable assets to an organisation. As such, choosing the right location for the centralisation 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 organisation’s business strategies/model, safeguard and protect its IP, and at the same time, contribute to its tax optimisation.
Cyprus offers these benefits, with an efficient IP tax regime, coupled with the protection of an EU Member State, as well as by signatories of all major IP treaties and protocols (refer to *Note 1 ).
Intellectual Property – Intangibles covered by the Cyprus IP tax regime:
- Copyrights, including: literary, musical, films, recordings and other artistic works, broadcasts, scientific, published works, databases and software programmes, among other
- Patented inventions, and
- Registered Trademarks (and service marks), designs and models that are used or applied on products.
Registering an IP in Cyprus
EU Directives and Regulations relating to IP protection apply and have been introduced into Cyprus domestic legislation. With a single IP registration process, IP rights owned by Cyprus companies may enjoy full protection in all other EU Member States.
Note: Registrable IP’s need not be registered in Cyprus to benefit from the IP Regime.
Tax benefits of Cyprus IP companies – ‘the IP box’ regime
- 80% of worldwide royalty income generated from IP owned by Cyprus resident companies (net of any direct expenses) is exempt from income taxation.
- 80% of profit generated from the disposal of IP owned by Cypriot resident companies (net of direct expenses) is exempt from Income tax.
- Cost of acquisition or development of an IP right acquired by the Cyprus Company, maybe capitalised and written off on a straight line basis over 5 years, giving an annual writing down allowance of 20%.
Thus, the effective tax rate of a Cyprus royalty company is 2.5% or less, by taking into consideration the capital allowances and expenses. This being the lowest in Europe, comparing favourably against the Netherlands where it is 5% and Luxembourg where it is 5.75%.
Application in practice and rules to comply
In practice, the Cyprus Company registers the Intellectual Property, or acquires it and becomes its owner.
The Cyprus Company becomes the Franchisor, which signs Franchise Agreements with other companies locally and internationally, according to the operational and financial means of the organisation. This arrangement is ideal for group of companies/structuring, as the Cyprus Company can become the holding Company and derive its share of profits from wholly owned and partly owned subsidiaries, from associates as well as from third parties.
- The Cyprus Company must be the legal owner of the Intellectual Property. This is achieved either by the Cyprus Company acquiring the Intellectual Property or registering, i.e. the Cyprus Company must be the owner and not subject to sublicense agreements.
- Registrable IP’s need not be registered in Cyprus to benefit from the IP regime.
- The intellectual property or/and trademarks have to be developed/ acquired and registered on the name of the Cyprus Company , the latest by 30 of June 2016 for the Company to be eligible under the Intellectual Property Tax Regime. Tax benefits are also available for IP’s acquired or developed before January 2012 (introduction of Cyprus Loyalty Scheme is dated May 2012).
- Under the current enacted Income Tax Law enacted, the 80% tax deduction from royalty income is applicable for the next years until 30/06/2021.
Double tax treaties, other tax planning opportunities, recent developments
- Since Cyprus is member of the European Union, the EU royalty directive applies under which royalty paid by other EU countries to Cyprus royalty company, is with zero withholding tax.
- In case of non EU countries, with which Cyprus has favourable double tax treaties (DTT exist with almost 50 countries), lower or zero withholding taxes on royalties apply and tax credits are issued against Cyprus taxation, e.g. double tax treaty with Russia: 0% withholding tax on royalties. In the case of Double Tax Treaty with Ukraine, 2% withholding tax on royalties applies, but tax credit is issued reducing tax paid in Cyprus at the effective rate of 2.5%.
- Various other tax benefits and tax planning opportunities arise e.g. no withholding taxes upon distribution of dividend to non Cyprus tax resident beneficial owners/shareholders (from residual profit of Cyprus Companies).
In addition , numerous other tax reliefs and incentives which enhance Cyprus corporate and personal tax competitiveness, including exemptions from taxation on dividends, rent income and interest for non domiciled individuals (non-doms), new tax law amendments effective as from 16 July 2015, as published in the Cyprus Government Gazette (will be discussed in articles to follow).
The Cyprus tax regime and the IP box provides attractive opportunities for structuring of IP assets through Cyprus and in particular through the use of Cyprus-resident IP owners, and in turn tax benefits, especially in conjunction with Cyprus extensive network of double tax treaties, under which withholding tax on royalty income is either eliminated or substantially reduced.
Cyprus is signatory to the following international conventions relevant to IP:
- European Community Trademarks
- Convention Establishing the World Intellectual Property Organization (WIPO)
- The Madrid Agreement concerning the International Registration of Marks ( the Madrid Agreement) and the Protocol of the Madrid Agreement
- The Patent Cooperation Treaty
- Berne Convention for the Protection of Literary and Artistic Works
- Paris Convention for the protection of Industrial Property
- Convention for the Protection of Producers of Phonograms Against Unauthorized Duplication of their Phonograms
- WIPO Performance and Phonograms Treaty
- Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations
- Trademark Law Treaty
- WIPO Beijing Treaty on Audiovisual Performances
Source: Director, Optimus Actus Services Ltd., Michalis Makriyiannis, ACCA, CIA
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