Royalties are the payments of license fees by one individual or entity to another for the use of intellectual property (IP). Intellectual property can take several forms as follow:
- Patents that protect inventions or new processes;
- Trademarks that relate to the names of products and perhaps also their design and packaging;
- Copyright, which attaches to any original creative idea expressed in words or pictures;
- Image rights.
In May 2012, the House of Representatives voted new amendments to the Income Tax Law, aiming to establish Cyprus as the ultimate royalty and holding structure jurisdiction.
These changes are particularly important for companies owning any kind of intellectual property rights, patents and trademarks (collectively referred to as IP Rights). Prior to the amendment, all profits from IP Rights were taxed under the normal corporate tax rate of 10% on any resulting net profits.
In light of the new amendment, 80% of profits generated as royalties from such I.P. Rights will be exempt from corporation tax. The remaining 20% will be subject to the normal corporation tax rate of 10%. In conclusion, the effective tax rate applicable on the Cyprus Royalty Company will not be higher than a maximum of 2% on its Royalty Profits.
To calculate the profit generated from royalties, we deduct from the total of the income derived from I.P. Rights, all expenses incurred wholly and exclusively for the production of the I.P. Rights income.
Additionally, acquisition of IP rights can be amortised – in equal instalments – over a period of 5 years (20% for 5 years).
All amendments have retrospective effect as from the 1st January 2012.
The amendment reaffirms Cyprus’ position as top holding jurisdiction for intellectual property. Where else can you find such a highly respected nation that effectively taxes IP rights at 2%, has a vast tax treaty network and can access the entire European Union on the basis of the EU royalty and interest directive?