Cyprus limited companies for intellectual property (IP) holding
Intellectual property refers to a creation of numerous intellectual units, such as literary and artistic works, inventions, designs as well as names, images and symbols used in commerce, for which a monopoly is assigned to the owner or creator of the said units. A related term is intellectual property rights, such as trademarks, patents, copyrights and industrial design rights, which enable the owner of the intellectual property to earn financial benefit and recognition for their products.
Intellectual property can be created by private persons or legal entities. Typically, companies that own intellectual properties find it beneficial to set up an Intellectual Property Holding, in which all these assets are registered and licenced for royalty income generation. Since intellectual property can often be among the most valuable assets of a company, choosing the right jurisdiction of an Intellectual Property Holding requires a careful consideration in order to ensure the most beneficial environment for the company and its assets. Three main aspects to consider before choosing the jurisdiction for incorporation of the Intellectual Property Hold are quality asset protection, legal framework and tax optimisation possibilities.
Benefits of having an IP structure on Cyprus
Cyprus has become an important player in the field of Intellectual Property Holdings since it introduced new tax legislation on Royalties in 2012. In addition to a beneficial tax regime, Cyprus can offer its companies a protection afforded by member states of the EU and all major Intellectual property treaties and protocols. Cyprus also has managed to link its world-wide network of double taxation treaties with its outstanding shipping, holding and intellectual property regimes and offers one of the lowest corporate tax rates in the EU – 12.5%. Additional benefits of choosing to register an Intellectual Property Holding in Cyprus:
- No withholding tax on payments of interest, royalties and dividends;
- No taxation on profits generated by the sale of securities and no minimum holding period;
- Unilateral tax credit relief.
Cyprus has also developed a strict Anti-Money Laundering legislation and is consistently positioned in high rankings among the EU Member States for compliance with AML practices and guidelines.
In order for an Intellectual Property Holding registered in Cyprus to benefit from the favourable tax regime, it must be protected by one of the following laws:
- Patent law – in Cyprus, the responsible body of issuance of national patent certificates is the Patent’s office of the Department of the Registrar of Companies. In the European Union, patent certificates are issued by the European Patent Office. International Patent Certificates are issued by the WIPO – World Intellectual Property Organization.
- Trademark law – domestically, protection of trademarks is achieved through registration with the Trademarks’ office. In EU, protection of trademarks is organized through EU regulations on the Community Trademark and the Community Design registration.
Cyprus’ tax regime
The favourable tax regime for Intellectual Property Holdings is displayed in three possible activities connected with the intangible assets: when income is generated from any form of qualifying intellectual property rights; when income is generated through sale of any form of qualifying intellectual property rights; and providing generous allowances for development or acquisition of intangible assets:
- Tax legislation on royalty profits – when receiving royalties for an intellectual property, 80% of the royalty is considered an expense by the Cypriot tax legislation, therefore no tax needs to be paid for the largest part of the royalty profits. The remaining 20% is subject to the traditional corporation tax rate of 12.5%. Additionally, before determination of the royalty profit, it is allowed to deduct from the royalty income all expenses that have incurred during the production of the royalty income.
- Tax legislation on profits from sale of a qualifying Intellectual Property Rights – The tax legislation on Intellectual Property Rights states that in case a company decides to sell all or part of its intangible assets, it will also enjoy the same favourable taxation as discussed above – 80% of the profit generated by the sale of the qualifying Intellectual Property Rights is deemed as expense and just the remaining 20% is subject to the traditional corporation tax rate of 12.5%. This provision allows companies to be sure that there is a tax efficient solution in case they decide to sell their Intellectual Property Rights.
- Tax legislation on development or acquisition capital allowances – companies registered in Cyprus are able to write off the total sum of the capital expenditures emerging during the acquisition or development of Intellectual Property. This can be done over the first five years of the use of the intangible asset – in a straight line of 20% starting from the first year and continuing throughout the subsequent four years of the usage of the asset. The described capital allowances are tax deductible, which means that the actual amount of tax paid during the first five years of the asset’s life is even smaller.
The effective tax rate applicable to the Intellectual Property Holding company registered in Cyprus is as low as 2.5% and can be even less if reduced by the capital allowances.