Intellectual property structures prosper in Cyprus

Sophie Stylianou

For companies active in the development and licensing of intellectual property (IP) rights, efficient ownership structuring is vital. The direction of the relevant licence payment is also important so as to make transactions as tax efficient as possible.

Cyprus has positioned itself among the best tax planning jurisdictions around the world for intellectual property related structures.

Cyprus royalty companies generally undertake the ownership of royalties and licensing rights for intellectual property.

Cyprus royalty companies are, just like all Cyprus resident companies, subject to 10% corporate income tax on their worldwide income.

Profits derived by a Cyprus royalty company with respect to income from royalties are subject to 10% corporate income tax.

The tax is imposed after the deduction of any royalty payments as well as expenses incurred wholly and exclusively for the production of income. Equally, Cyprus income tax law provides for a unilateral tax credit with respect to foreign tax paid on the said income.

Gains deriving from the sale of IP may, in some cases, be exempt from Corporate income tax, unless the said gain is deemed to be a result of the trading activities of the company.

Cyprus does not provide for a withholding tax on royalty payments given that the rights are exercised outside Cyprus.

The extensive network of double tax treaties concluded by Cyprus, enables the imposition of low or no withholding taxes at the level of the licensee, upon payment of the royalties to the Cyprus company.

Equally, the provisions of the EU Interest and Royalties Directive applicable where the Cyprus company receives royalty payments from an associated company established in another EU-member state, thus providing for an elimination of withholding taxes over the royalty payments.

Sophie Stylianou (sophie.stylianou@eurofastglobal.eu), Nicosia

Cyprus emerges in the global shipping industry

Christos Massos

The negative impact the banking crisis is having on the shipping industry is set to continue as the world's banks attempt the claw-back of loans from ship owners struggling to meet repayments. Recent statistics published by Clarkson's show considerable reductions in revenues in all vessel sectors with revenues down by almost 70% in some cases. The Clarkson statistics reveal revenues generated similar to income levels of 2003. Undoubtedly, operating costs are not parallel to those operating costs of six years ago so the rapid downfall in the shipping industry on a world wide scale is plain to see.

What does the future hold for shippers operating within the EU with further constraints likely amidst concerns over global climate change and continued pressure from environmental groups? There is worldwide governmental recognition to reduce carbon emissions and emission reductions in shipping will gather pace with Sweden proposing a cap on emissions in both aviation and shipping industry.

Speaking at the Maritime Cyprus Conference held in Limassol on September 28 2009, Nicos Nicolaides, minister of communications and works was more optimistic about Cyprus's shipping market asserting;

"Cyprus shipping has a leading role in the world stage and the intention of our government is to further strengthen this role and support Cypriot shipping through specific programmes, positive planning, new tax packages, motive-setting infrastructure and all that range of services and actions necessary to retain and extend the role of Cyprus in the top spots of international commercial shipping"

So what are the new are tax packages on the horizon? Cyprus offers a favourable tax treatment of shipping business related activities. A brief summary of tax benefits in relation to shipping activities that has contributed in Cyprus boasting the 10th largest shipping fleet in the World (now ranked third in the European Union) are noted below;

• No income tax is payable on the profits derived from shipping activities by a Cyprus shipping company which owns ships under the Cyprus flag.

• A very competitive annual tonnage tax or ship companies may opt to apply the reduced rate of 4.25% on income from provision of ship management services (corporation income tax)

• No capital gains tax is payable on the sale or transfer of a ship or shares in a shipping company.

• No stamp duty is payable on bills of sale and mortgages on ships and related documents.

In addition to the above and up to 31/12/2020 ship-owning companies are exempt from income tax on;

• Profits deriving from the operation and management of a ship registered in Cyprus

• Income of any person from the provision of ship-management services

• Dividend distributed to the shareholders deriving from the operation and management of a Cyprus registered ship or the provision of ship-management services

• On the emoluments of the captain, officers and crew.

Legislative proposals and current developments in the ship management industry

In June earlier this year, the European Commission issued a revised guideline approving the application for Cyprus to continue operating a tonnage tax system on the island, with the Department of Merchant Shipping (DMS) welcoming this approval as it will enhance competitiveness in the EU fleet. Applying tonnage tax in place of flat corporation tax will encourage ship owners and ship management companies to the island and so approving this system is of great importance to the Cyprus maritime industry.

The DMS is now in the final stages of negotiations with the EU and seeking final approval of the proposals numbered 1 & 2 below;

1) The grant of tax relief with respect to joint and separate crew and technical management, subject to meeting a strict criteria some of which is summarised below;

In order to be granted relief the ship manager must demonstrate;

• Contribution to the economy and employment within the community, in other words those employees land based and sea based must be EU citizens.

• There must be an economic link between the managed ships and the Community – within the territory of the European Union.

• There is an obligation on each crew member and vessel within the fleet to comply with international and European Community standards.

• Additional conditions for crew management in respect training provided for seafarers and both living/social conditions must comply with maritime regulations.

In addition to the above the following is also sought;

2) Further tax exemption on income derived from; EU flags, time charterers, mobile off-shore drilling units and interest earned on shipping income taxed under normal taxation rules.

As to whether both proposals will meet EU approval is something of a lottery despite the revised guidance note from the commission. Extensive lobbying and negotiation undertaken by the DMS has obviously swayed commission thinking but will the EU be swayed to the same extent. There is a stronger possibility the first legislative proposal will be approved but the second proposal may prove a step too far. If however, the second proposal is accepted, stringent criteria will no doubt be applied.

The deadline for the legislative matters to be concluded has been set for the end of the year and should one or even both proposals receive EU approval shippers surviving the crisis may well be encouraged to increase their investment or re-locate their operations to Cyprus which in turn will continue Cyprus's emergence as a key player in the shipping industry worldwide.

Christos Massos (chris.massos@eurofast.net)