Consulco Presents The Royalty Routing Company Structure

Introduction

For many multinational companies, the development and licensing of intellectual property can be considered as one of their most important activities (or even their main activity). Licenses can be granted to third parties or related parties.

Adequate structuring of the ownership of the intellectual property and channeling of the license payments can lead to significant tax benefits.

The use of a Cyprus company can play a significant role in this process. This publication explains some of the tax benefits the international business community can enjoy by using Cyprus royalty companies in their tax planning.

Cyprus Tax System

Cyprus has the lowest corporate income tax rate in Europe, set at 10 %. Gains realized by Cyprus companies upon the sale of intellectual property may be exempt from corporate income tax in Cyprus.

Cyprus does not impose withholding taxes on royalties paid by a Cyprus company, provided that the rights are exercised outside Cyprus by the Cyprus company. This is irrespective of the location of the (non-resident) recipient to which the Cyprus company makes the royalty payments.

In case of payments by group companies, resident in the other 26 EU-Member States, to a Cyprus license company, the so-called “EU Interest and Royalty Directive” can provide for complete exemption from any withholding tax over the royalty payments.

How it works

Two situations can be distinguished:

Scenario 1:
First of all, a Cyprus company can act as the owner of the intellectual property (IP). The Cyprus company will license the IP to various external and/or related foreign customers.

Scenario 2:
The other situation is where an offshore company, situated in a no or low tax jurisdiction (for example a BVI company), owns the IP. Since direct payments from foreign companies to the BVI company will in many cases suffer withholding tax because of the absence of any tax  treaty providing for reduction thereof, the interposition of a Cyprus company can lead to significant tax benefits, given the Cypriot company’s access to Cyprus’s treaty network, which may result in reduction of or even exemption from such withholding tax.

The BVI company will conclude a license agreement with the Cyprus company for the use of the IP. The Cyprus company will sub-license the right to use the IP to the various external and/or related foreign customers.

Cyprus Taxation

Scenario 1:
The net profits will only be subject to 10% corporate income tax in Cyprus (apart from a possible gain upon the sale of the intellectual property, which under circumstances may even be exempt from corporate income tax). Any foreign source tax that still has to be withheld can be credited against Cyprus corporate income tax payable.

Based upon Cyprus’s treaty network and/or the EU Interest and Royalty Directive, withholding tax over the royalty payments can be reduced, in certain cases to zero %.

Dividends paid by the Cyprus company to its foreign shareholder will not suffer any dividend withholding tax in Cyprus.

Scenario 2:
The Cyprus company will receive the royalties and will retain a  license fee (e.g. at 5% rate) over which it will have to pay 10% corporate income tax. The remaining 95% will be paid to the BVI company where there will be no additional taxation. Any source tax withheld over the royalties received by the Cyprus company can be deducted from corporate income tax payable in Cyprus.

Based upon Cyprus’s treaty network and/or the EU Interest and Royalty Directive, withholding tax over the royalty payments to the Cyprus company will be reduced or there will even be an exemption from withholding tax.

Royalty payments made by the Cyprus company to the BVI company will not be subject to withholding tax in Cyprus, based upon the fact that the Cyprus company exercises its license right outside Cyprus (through the licensing to non-Cyprus based customers).

Dividends paid by the Cyprus company to its foreign shareholder will not suffer any dividend withholding tax in Cyprus.

Summary of advantages of a Cyprus royalty company

• Large double tax treaty network.
• The possible applicability of the EU Interest and Royalty Directive and other EU-Directives.
• The lowest corporate income taxation (10%) in the EU.
• Possible  corporate income tax exemption for gains upon the sale of IP.
• No withholding tax on royalty payments.
• No withholding tax on dividends to non-residents.
• No withholding tax on interest payments to non-residents.
  

Additional advantages

• No capital tax over capital contributions into Cyprus resident companies.
• No thin capitalization rules.
• No Cyprus (corporate) income taxation over dividends/capital gains derived from the shares in Cyprus based companies by non-Cyprus shareholders.
• Low capital requirements.
• Fast incorporation procedures.
• Low maintenance expenses.
• Well developed infrastructure.