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Introduction

The principle of property rights is a cornerstone of a free society. The right to property is the recognition that an individual has ownership over that property, and may use it as he wishes, and that nobody else can lawfully use it without his authorisation. Intellectual property “IP” refers mainly to the legal rights which result from the creativity of people: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce.

Cyprus has been developing the area of IP law along with the rest of the world so as to protect local as well as international IP rights. It is a member and signatory to a number of treaties and furthermore the IP Law in Cyprus has been recently amended and is now in full compliance with the acquis communautaire, and international IP laws.

Major Tax Factors:

1. Tax treatment of Royalties paid
2. Tax treatment of Royalties received
3. Tax treatment on the assignment of Royalties

1.) Tax treatment of Royalties paid - Income derived from sources outside Cyprus

Any resident company entering into any contract with any individual not resident in Cyprus or with any company not engaged in any business in Cyprus, in connection with the following transactions

and receives income derived from sources outside Cyprus (the granting of licenses to overseas licensors by a Cyprus company will qualify as such), this amount shall not be deemed as income derived from sources within the Republic and thus no tax should be charged.

1.) Tax treatment of Royalties paid - Income derived from sources inside Cyprus

Any resident company entering into any contract with any individual not resident in Cyprus or with any company not engaged in any business in Cyprus, in connection with the following transactions

and receives income derived from sources inside Cyprus, shall deduct tax at the rates shown above from any receipts made on or on behalf of, or from any payments made or to be made to, such individual or company and remit the same forthwith to the Commissioner of Income Taxes.

Exemptions

If the Beneficial owner of the income is an associate company. Provided that the beneficial owner of the income is an associated company of another Member state or a permanent establishment of such company situated in another Member state where such income is paid.

Royalties Directive

It is important to state here that this exemption as well as the exemption on Royalties is in full conformity with the Interest and Royalties Directive of the EU which Cyprus has adopted and has included in its legislation.

2.) Tax treatment of Royalties received

Royalties received by a Cyprus resident company that is granting licenses to overseas licensees are taxed at the standard corporate income tax rate of 10% after deducting the following expenses:

• Royalties paid to overseas licensors.
• Deduction of all expenses wholly and exclusively incurred for the production of income.

Cyprus Income Tax Law provides relief from double taxation in relation to tax imposed by the laws of another country. Relief is given for any foreign source tax as a credit against corporate income tax payable in Cyprus in respect of that income. Cyprus has an extensive double tax treaty network. In most of the cases, royalties received by a Cyprus holding company from its licensees are either exempt from, or subject to, reduced withholding taxes in the licensee’s jurisdiction.

3.) Tax treatment on the assignment of Royalties

Money received by a Cyprus resident company, upon the transfer/assignment of Intellectual Property might be exempt from corporate income tax in Cyprus.

Article 5 of the Income Tax Law states that any amount or consideration in respect of any trade goodwill reduced by any amount incurred for the purchasing of such trade goodwill shall be liable to 10% income tax. Hence, where a Cyprus company is in the business of purchasing and selling intellectual property in general, gains realised upon the sale of Intellectual Properties are taxable to 10% income tax.

If on the other hand a Cyprus company is acting as a Group licensing company and is not actively involved in the purchasing and selling of intellectual property in general, a gain that is realised upon the sale of Intellectual Property by this company, would have a strong argument to purport that such a gain will not be taxable.

A pre-transaction ruling will serve to remove any taxation uncertainties in respect of this particular type of transaction as described above.