Royalties are the payment of licence fees or commissions by one individual or entity to another for the use of intellectual property (IP) or physical assets owned by the licensor. There are different forms this IP can take shape; patents, trademarks, design and packaging, copyrights, rights from images e.g. photographs taken for an advert will have different rights depending on where and when the advert is aired, and for how long. All these factors are calculated when calculating the amount of royalty fees the photographer should get.
Taking the above example of a photographer, often, the income arising from these rights is very high and finding the most tax efficient structure for this income is beneficial. An intermediary company would be a good option.
Basically, the person owning the IP would donate or sell it to an offshore company which then licences some or all of the rights to the IP use to an onshore intermediary in a jurisdiction offering tax benefits. The intermediary then will licence the rights in various locations in order to exploit the IP.
The royalty fees then pass to the intermediary company, which may be subject to zero of low witholding tax due to double tax treaty benefits. They then retain a fee for the work done in negotiating contracts and will pay tax on this sum. Finally, the onshore intermediary company remits the balance to the offshore company free of any further withholding taxes.
Cyprus is a good option as an intermediary as:
- It has the lowest tax regime on IP rights in Europe (maximum 2% tax on profits generated from IP);
- There is no withholding taxes on payment of royalties when distributed out of Cyprus provided that the holder is not a Cyprus resident.
- Tax is only paid on licence fee held by Cyprus company.
- Cyprus has double tax treaties with a vast range of countries worldwide. As an EU member, and therefore the directive on interest and royalties applies which provides for 0% withholding tax between EU countries.
- Cyprus corporate tax is 12.5% and is among the lowest in Europe.
- Of course when considering routing your royalties through an intermediary, it is better when the value of the IP is still low and therefore transferred to an offshore company at little value.
The above is just a brief example of how royalties can be routed going through an intermediary in a tax efficient jurisdiction. If you are looking to optimise your royalties, Cyprus is a good location to look at for achieving this.
For further information on the Cyprus IP Tax Regime, please refer to our related brochure.