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

 

The use of a Cyprus royalty company can play a significant role in this process:

 

- no substance requirements;

- no withholding tax on royalties paid by a Cyprus company
   (provided that the rights are exercised outside Cyprus);

- possible capital gain or corporate income tax exemption for
   gains derived from the sale of intellectual property.

 

Two situations can be distinguished:

 

Scenario I

 

A Cyprus company can act as the owner of intellectual property. It will license this intellectual property to various external and/ or related foreign customers.

 

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 taxation). Any foreign source tax that still has to be withheld can be credited against Cyprus corporate income tax payable.

 

Based upon Cyprus' treaty network and /or the European Union (EU) “Interest and Royalty Directive”, withholding tax over the royalty payments can be reduced or even be eliminated.

 

Dividends paid by the Cyprus company to its foreign shareholder(s) will not suffer any dividend withholding tax in Cyprus. If the shares in the Cyprus royalty company are held by a European Union (EU) resident company, dividends from the shares in the Cyprus company should enjoy the benefits of the European Union (EU) “Parent Subsidiary Directive” at the parent company's level.

 

Scenario II

 

An offshore company, resident in a no- or low-tax jurisdiction (for example: a British Virgin Island company), owns intellectual property.

 

Since direct payments from foreign companies to the British Virgin Island 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 be beneficial.

 

The British Virgin Island company will conclude a license agreement with the Cyprus company for the use of the intellectual property. The Cyprus company will sub-license the right to use the intellectual property to the various external and/ or related foreign customers.

 

The Cyprus company will receive the royalties and will retain a 5% license fee, over which it will have to pay 10% corporate income tax. The remaining 95% will be paid to the British Virgin Island 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' treaty network and/ or the European Union (EU) “Interest and Royalty Directive”, withholding tax over the royalty payments to the Cyprus company will be reduced, or there will even be a total exemption from withholding tax.

 

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

 

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