Thursday 26 July 2012

Cyprus offers 2% -- can you do better?

A couple of years ago, IP Finance posted a question: "Intellectual property tax havens: where's best?"  This question didn't receive many responses at the time, but IP Finance's readership has grown greatly since May 2010 and the same question, posted today, might attract far more answers.

This slightly historical musing has been prompted by the news, from Stefan Nolte of Shanda Consult, Cyprus, that 2% is the effective tax rate on income from IP in Cyprus. Stefan writes:

"A recent amendment to the tax law, in force since 06 July 2012, provides 80 % tax exemption on income from IP. The remaining 20 % of the income from IP are taxed at ordinary 10 % corporation tax, which results in an effective tax rate of 2 % on the income from Intellectual Property. 
Intellectual Property includes: patents, brand names, software development, copyrights on music, visual productions (film, TV etc), book etc. 
Income from IP: income from the sales of IP or from license fees received for granting the right to use IP. 
Depreciation of IP development costs or IP purchase costs is 20 % annually".
Can readers from other jurisdictions improve on this? And can they also warn of possible downsides that low-tax seekers might not appreciate if locating their IP portfolios in tax havens?


Anne Fairpo said...

Malta might give Cyprus a bit of a run for its money on this - 0% tax on income from patents and copyright and foreign source royalties, and depreciation on IP is over 3-6 years depending on the IP (so 33% to 17ish%)

Paul Keating said...

Luxembourg has maintained an IP regime since the expiration of its H29 Holding Company rules (which were 0 tax). It uses the same exception of 80%. The exclusion applies only to passive royalty income. 3-5 year depreciation is allowed. The holding company need not be the actual owner but must have ownership-like rights (e.g. exclusive license from a 3rd party). The Luxembourg method allows for interesting use of a captured subsidiary which may then engage in active business (not merely passive royalty generation). The royalty rate as between the parent and subsidiary are subject to negotiation with the local authorities pursuant to a private letter-type ruling system. Overall taxable rates are certainly comparable to those of Cyprus. The added benefit is that Luxembourg is somewhat more a "blue-chip" jurisdiction and certainly one that has not requested a bailout such as Cyprus has. Finally, I find the overall environment to be far more professional and speedy than that of Cyprus which ha formalistic requirements for Greek language and annual auditing of even privately held firms. In addition, Luxembourg is quite aggressive in reducing VAT rates and I understand that either now or soon, VAT on e-book sales will drop to 3%. Normal VAT is 15% which is among the lowest in Europe. And with that I should ask for a commission ! :-)