Intellectual property in international tax planning has always occupied a central place. Proper structuring of corporate schemes using intellectual property can save considerable amounts on taxes and legally protect the capital.
What is Intellectual Property?
According to World Intellectual Property Organization (WIPO) the objects of intellectual property include:
- Literary and artistic works
- Designs and symbols
- Names and images used in commerce
- And many more
The types of intellectual property:
- Industrial Designs
- Geographical Indications
Advantages of Using Intellectual Property for Tax Optimization Purposes
Copyrights, patents, trademarks and other intellectual property rights in terms of tax planning can become an effective instrument against other goods and services. The main advantage is that IP price cannot be established on the basis of any uniform rules and there are no restrictions on the parties to freely set the price of such property. The intellectual property rights do not consist of physical assets and can be easily moved between different tax systems and jurisdictions. This is why the use of intellectual property rights is a very convenient way to legally reduce the tax burden and the withdrawal of capital to a safer jurisdiction.
In 2012 the Government of Cyprus lobbied a package of incentives and tax exemptions to local legislation, which established a special preferential treatment for companies that hold intellectual property rights, commonly known as "IP-box" (Intellectual Property Rights Box).
The corporate income tax rate in Cyprus is 12.5%, the lowest in Europe. The following are exempt from corporate income tax:
• 80% of net income received by a Cyprus resident company in the form of royalties; and
• 80% of income derived from the alienation of intellectual property rights.
Thus, the effective income tax rate for companies, holders of intellectual property rights is 2.5%.
It should be noted that this rate is the lowest in the EU. For comparison:
• In the UK and Ireland related taxation regimes provide revenue received in the form of royalties at the rate of 10%
• In Belgium, - 6.8%
• In Luxembourg, - 5.76%
• In the Netherlands - 5%
Any costs accrued by a Cyprus company for the purchase of intellectual property rights are considered as a tax deduction for the year in which they were purchased, as well as for four subsequent years. In addition, the gross income received in the form of royalties can be deducted from a certain type of expense directly related to intellectual property.
Protection of Intellectual Property Rights
The Intellectual Property Rights in Cyprus enjoy a high level of protection and can be easily defended by a local court. In addition, the Republic of Cyprus has signed many international treaties relating to the registration and protection of such rights:
- Convention Establishing the World Intellectual Property Organization (WIPO)
- WIPO Beijing Treaty on Audio visional Performance
- Madrid Agreement Concerning the International Registration of Marks and the Protocol Relating to that Agreement
- The Patent Cooperation Treaty (PCT)
- Berne Convention
- Paris Convention for the Protection of Industrial Property
- Geneva Phonograms Convention
- International Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations
- Trademark Law Treaty
- European Community Trademark
Other Advantages of Cyprus
- Political stability
- No exchange control restrictions
- No withholding tax on dividends (incoming and outgoing)
- A wide number of agreements on avoidance of double taxation
Among the common disadvantages of using Cyprus companies are the following:
- The relatively highcost of registrationand annual company maintenance
- AllCypriot companiesshould be required toundergoan annual auditand submit financial statements
- Shareholders and directors’ details are available for public view (however, nominee services can be used)
- Cyprus is financially unstable due to the 2013 financial crisis.
The Main Types of Royalty Routing Structures
There are two types of commonly used structures for IP Box companies:
- When the Cyprus company owns the IP;
- When Cyprus Company sub-licenses the IP rights from offshore company.
In order to create an effective business model and significantly optimize taxation it is crucial to choose the appropriate scenario that fits your particular case. Please seek the advice of professionals to evaluate your specific needs and appropriate royalty routing structure.
How Can We Help?
- Starting Business professionals will analyze your business model and establish the feasibility of Cyprus "IP-box companies".
- We will establish your Cyprus Company at an affordable price.
- We will maintain and manage Cyprus Company on your behalf.
- We will maintain and complete your accounting records.
- We will advise on the transfer of existing intellectual property rights under management of Cyprus Company.
IMPORTANT NOTE: Because of the OECD political pressure on Cyprus, the preferential "IP-box" regime will be canceled from June 2016. However, companies that join the scheme before then can benefit from substantial savings until the middle of 2021. All that is required is to form a company in Cyprus for holding or transferring your intangible assets into it.