Cyprus limited companies for IP holding
Cyprus offers a very useful IP tax regime. The law provides for a certain tax exemption for income derived from intellectual property. More specifically, 80% of the worldwide royalty income generated from IP owned by a Cyprus tax-resident company (net of direct expenses) is exempt from income tax. In addition, 80% of profits generated from the disposal of IP owned by Cyprus-resident companies (net of direct expenses) is also exempt from income tax, and any expenditure of a capital nature for the acquisition or development of IP is tax-deductible in the year in which it was incurred and the four subsequent consecutive years.
Cyprus' IP tax regime
The Republic of Cyprus provides the following tax regime for intellectual property royalty structures based on Cyprus-resident legal vehicles.
- 80% of worldwide royalty income generated by IP owned by Cyprus-resident companies (net of direct expenses) is exempt from income tax.
- 80% of profits derived from the disposal of IP owned by Cypriot companies (net of direct expenses) is exempt from income tax.
- The cost to a Cyprus-based company of acquiring or developing an IP right may be capitalised and written off on a straight-line basis over five years, giving an annual writing down allowance of 20%.
- Thus, the effective tax rate for a Cyprus-registered royalty company is 2.5% or less, taking capital allowances and expenses into account.
What you need to consider when structuring a Cyprus IP holding company
A Cyprus company registration demands a number of things to be considered.
Bear in mind that the acquisition of intellectual property rights from anywhere in the world by a Cyprus-based company is treated as a service rendered to that company, which will create an obligation for it to register and account for VAT in accordance with the reverse charge mechanism. If the company charges royalty fees to taxable persons within the European Union area it will also have to register for the EU's VAT Information Exchange System.
Fees for supplying the right to use the IP (i.e. license fees) are taxable for VAT purposes.
To this end, the IP company will be obliged to register with the VAT authorities in Cyprus and to apply Cypriot VAT to the value of any license fee charged to Cyprus-based entities when the revenue from the supply of the right to use the IP (i.e. license fees) to such entities exceeds EUR 15,600 in the preceding 12 months.
Registration with the relevant VAT authorities in Cyprus is compulsory when a legal person receives services from abroad, either from EU countries or from outside the EU, worth over EUR 15,600.00, at which point the reverse charge principle comes into play.
If the IP company licenses the IP to EU entities, there is an obligation to register for VAT purposes and submit VIES returns on a monthly basis (there is no threshold for intra-community services).
Doing so will grant the IP company the right to fully recover any input VAT incurred on local expenses.
Supply of services to states outside the EU
The supply of certain services to businesses or private persons located outside the EU, whether or not they are engaged in economic activity, does not create any obligation for VAT registration as they are considered to be outside the scope of VAT. These services include the assignment and granting of intellectual property rights, patents, licenses, trade marks and similar rights.
Companies registered in Cyprus, if managed and controlled from Cyprus, will receive a tax clearance certificate. In order for the company to maintain its management and control in Cyprus, the majority of the company’s board of directors must be Cyprus residents, the company’s secretary and registered office must be located in Cyprus, the board of directors must hold its meetings in Cyprus and, if possible, the company’s shareholders should hold some of their meetings in Cyprus. The tax authorities have also increased their requirements and are now looking into the issuing of powers of attorney by companies. If a general power of attorney is issued by the company allowing someone who is not resident in Cyprus for tax purposes to act on its behalf, this might render the company non-tax resident.
Registering trade marks and trade names
These are two different procedures, and the registration takes place at different levels. Trade names are registered with the Cyprus Registrar of Companies, whereby the company confirms that it is the owner of this trade name and uses it for its business purposes within the Republic of Cyprus. The registration only applies to the name and not the relevant trade mark. Trade marks can be registered at a national, European or international level. Depending on where the company offers its services, the trade mark may be registered at the European level, which means that one application is sufficient to register it for use throughout Europe. If the client would also like to use the trade mark in non-EU countries, separate registration procedures would need to be followed with each individual country. Consider registering the trade name first, before proceeding with trade mark registration, in order to completely secure it. The usual timeframes are as follows:
- Trade name: up to ten business days plus two to three days to receive confirmation of approval from the Cyprus Registrar.
- Trade mark: approximately six months depending on each individual application, where there are no objections to the EU registration.
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Jurisdictions often used in intellectual property holdings
Our corporate agents and tax advisors have capability to develop tailor-made solutions in many jurisdictions, however, some countries offer more favourable corporate legislation and tax regime than others. Our lawyers advise considering following jurisdictions for the IP holding structure setup.