TREATY SHOPPING FOR LICENSING STRUCTURES – MINIMISE TAX EXPOSURE ON LICENSING INCOME TO AS LOW AS 0% – MAXIMUM 15%
Marinos D. Marinou
One major issue in licensing structures where license fees are paid between related parties is arms length pricing. Anti avoidance provisions are often found in Double Tax Treaties and domestic legislation restricting the license fee deductible to what which would be paid on an arms length basis.
However, if the party involved i.e. the trademark owner can demonstrate that completely independent third parties presently pay the same license fees as those apply inter Group then no tax authority shall challenge this. None the less great care needs to be taken if this license fee rate is to be exceeded in terms of documenting the commercial rationale for the increase.
Fact 1: It is well known that Cyprus currently has more than 60 Double Tax Treaties; https://dmarinou.com.cy/cyprus-tax-treaties/
Marinos D. Marinou
On the other hand, if no local withholding taxes exist and subject to any other local anti avoidance provisions concerning dealings with 0% tax jurisdictions directly that license fees should be paid directly to a 0% tax jurisdiction.
However, not all 0% tax jurisdictions enjoy the same clarity and respect from the EU (see recent list of EU’s non-cooperative jurisdictions). The difficulty arises in a jurisdiction which, in the absence of a Double Tax Treaty, imposes withholding taxes which can be significant.
Proper planning can of course counter this issue.
Fact 2: Cyprus is a member of the EU thereby enjoys 0% withholding tax inter EU for license fees.
Fact 3: Tax rulings in Cyprus are given within 21 days in order to satisfy any concerns of the arms length transactions inter Group.
It is crucial in such planning structures that the vehicle chosen can demonstrate clearly that it is resident in the relevant country so as to be able to take advantage of its Double Tax Treaties. This means that the management and control of the Company must be in that country.
Fact 4: Once all taxes have been paid and no liabilities with the tax office exist tax residency certificates in Cyprus are issued within only a few days.
Fact 5: Cyprus is a country whose law is based on English common law therefore makes contractual issues easier to understand and there is a large body of professionals who speak fluent English and practice using common law principles.