Cyprus Intellectual Property Company - The Cyprus IP Box Regime
Intellectual Property (IP) can be one of the most valuable assets of an individual or a company. Choosing the right location for the centralisation and management of IP is a highly important commercial decision.
Cyprus is known as a very attractive jurisdiction for the establishment of Intellectual Property/Royalty holding companies and holding structures in general. For professional assistance and advise please contact solutions@oxfordcy.com.
CYPRUS AN IDEAL LOCATION FOR INTELLECTUAL PROPERTY ASSETS: KEY BENEFITS
- Cyprus is an attractive location for the establishment of an IP holding and development company, offering an efficient tax rate (effective corporate tax rate as low as 2.5%) as well as the legal protection afforded by EU Member States and by the signatories of all major IP treaties and protocols;
- Cyprus offers a “deemed deduction” of 80% of qualifying profits generated from qualifying assets for the computation of tax during the year;
- Cyprus provides a zero withholding tax on outbound dividends, interests and royalties to non-residents of Cyprus (physical and legal person) except in the case of royalties earned on rights used within Cyprus, which are subject to WHT of 10%. Such Cyprus WHT on royalties for rights used within Cyprus may be reduced or eliminated by Double Tax Treaty entered into by Cyprus or by the EU Royalty Directive as transposed into the Cyprus tax legislation;
- Cyprus provides unilateral tax credit for any tax withheld overseas on the payment of Royalties (as well as dividends and interest). Thus the tax in Cyprus can be reduced to a very low amount or zero in most cases;
- Large network of tax treaties with very favorable clauses. Many of the treaties impose low or nil withholding tax on dividends, interest or royalties at source;
- European Union parent subsidiary directives apply;
- Registration to V.A.T. for EU transactions;
- EU presence.
STRUCTURE OF CYPRUS ROYALTY ROUTING
Illustration 1 – Royalties Paid to a Non-EU Company
A Russian tax resident company licenses its intellectual property to a Cyprus tax resident company. The Cyprus company pays €100,000 in royalty fees to the Russian company for the use of the intellectual property.
Scenario 1 – Intellectual Property Used Both Inside and Outside Cyprus
The Cyprus company exploits the intellectual property both within and outside Cyprus, with 50% of the income generated in Cyprus and 50% generated outside Cyprus.
- The portion of the royalty attributable to the use of the intellectual property within Cyprus may be subject to 10% Cyprus withholding tax, unless a reduced rate or exemption is available under the applicable Double Tax Treaty.
- The portion attributable to the use of the intellectual property outside Cyprus is not subject to Cyprus withholding tax.
Scenario 2 – Intellectual Property Used Exclusively in Cyprus
Where the intellectual property is used solely within Cyprus, the entire royalty payment of €100,000 may be subject to 10% Cyprus withholding tax, unless reduced or eliminated under an applicable Double Tax Treaty.
Scenario 3 – Intellectual Property Used Exclusively Outside Cyprus
Where the intellectual property is used exclusively outside Cyprus, no Cyprus withholding tax applies to the royalty payment.
Effect of a Double Tax Treaty
Where Cyprus has concluded a Double Tax Treaty with the recipient’s country of residence providing for a lower withholding tax rate or an exemption, the treaty provisions will generally prevail, subject to the applicable conditions.
Illustration 2 – Royalties Paid to an EU Associated Company
An EU resident company licenses intellectual property to a Cyprus tax resident company. The Cyprus company pays €100,000 in royalty fees.
Assume the intellectual property is exploited both within and outside Cyprus.
Where the conditions of the EU Interest and Royalties Directive (as implemented in Cyprus) are satisfied:
- No Cyprus withholding tax is imposed on the royalty payment, even where the intellectual property is used within Cyprus.
Associated Companies
The exemption generally applies where:
- one company directly holds at least 25% of the share capital of the other; or
- a third company directly holds at least 25% of the share capital of both companies,
and the relevant ownership and other statutory conditions (including the minimum holding period, where applicable) are satisfied.
Key Advantages
- No Cyprus withholding tax on royalties relating to intellectual property used outside Cyprus.
- Access to Cyprus’ extensive Double Tax Treaty network, which may reduce or eliminate withholding taxes.
- Potential exemption under the EU Interest and Royalties Directive for qualifying associated EU companies.
- OECD- and EU-compliant intellectual property regime with an effective tax rate of as low as 2.5% on qualifying IP income.