Tag Archives: European Union

  • -

Yacht Registration

Tags : 

Yacht Registration: Cyprus the Preferred Location

 

YACHT LEASING SCHEME

 

On 13 March 2012, the Cyprus VAT Authorities announced the implementation of a new yacht leasing scheme though the issue of Circular 163 (updated under Circular 198 issued on 25th November 2015) (the “Yacht Leasing Scheme”) making Cyprus one of the most attractive EU jurisdictions for yacht registration.

As a result of the Yacht Leasing Scheme, the VAT on the purchase of a yacht can be reduced to as low as 2.42% on the initial value of the yacht, a rate that compares favorably to the 5.4% applicable in Malta under their corresponding yacht leasing scheme.

Under the Yacht Leasing Scheme a Cyprus company can enter into a lease-sale agreement of a yacht with a third-party paying only a percentage of VAT compared to the standard VAT rate of 19%. Such percentage is based on the time the yacht is deemed to sail within EU waters and, as analytically set below, this percentage has been predefined by the Cyprus VAT authorities based on the length and the type of yacht (motor or sailing).

 

GUIDANCE TO THE YACHT LEASING SCHEME

 

Interpretation

The yacht leasing agreement is an agreement whereby the lessor (the owner of the yacht) contracts the use of the yacht to the lessee (the person who leases the yacht) in return for a consideration.

Such an agreement can, at the end of the lease period, provide the option to the lessee to purchase the yacht at a fraction of the original price. Such final purchase is strictly an option which may be exercised by the lessee, at the end of the lease period, for a separate consideration.

Vat Treatment

For VAT purposes, the leasing of the yacht is considered as a supply of services with the right of deduction of input VAT by the lessor. This supply of services by the lessor is taxable at the basic VAT rate of 19% but only to the extent that the leased yacht is used within the territorial waters of the European Union (“EU”) (refer to Table A and Table B below).

A strict condition which applies is that the lessor must be a company registered in Cyprus, whereas the lessee can be any natural or legal person, irrespective of country of incorporation or residency[1].

From 1st January 2013 the place of supply of pleasure yachts (except short-term leases) is the country where the yacht is made available to the recipient-lessee.

Calculation of Use in EU Territorial Waters

For the purpose of calculating the use of a yacht within EU territorial waters and due to the inherent difficulty of tracing the movements of each yacht in order to determine the time that the yacht is used within the territorial waters of the EU and the time it is used outside the EU, the Yacht Leasing Scheme provides that Cyprus VAT will only be applied on a percentage of the lease depending on the length and type of the yacht (motor or sailing yachts), without the need to maintain for VAT purposes, any detailed record or log books of the movements of the yacht.

 

VAT RATES APPLICABLE

 

Tables by the Cyprus VAT authorities setting the applicable presumed percentage of use of the yacht in EU territorial waters and the effective VAT rate:

Length of yacht Presumed percentage of use within EU territorial waters Effective VAT rate on lease payments*
Length over 65 meters 10% 2.42%
Length between 45.01 and 65 meters 15% 3.72%
Length between 24.01 and 45 meters 20% 37%
Length between 14.01 and 24 meters 30% 6.32%
Length between 8.01 and 14 meters 50% 10.21%
Length up to 8 meters 60% 12.16%
Boats allowed to sail only within protected waters 100% 19%
Length of yacht Presumed percentage of use within EU territorial waters Effective VAT rate on lease payments*
Length over 65 meters 10% 2.42%
Length between 45.01 and 65 meters 15% 3.72%
Length between 24.01 and 45 meters 20% 37%
Length between 20.01 and 24 meters 30% 6.32%
Length between 10.01 and 20 meters 50% 10.21%
Length up to 10 meters 60% 12.16%

* The effective VAT rate takes also into account that the final installment for the purchase of the yacht should not be less than 2.5% of the initial value of the yacht and that such final payment will be subject to the standard VAT rate applicable (i.e. 19% without any discount on presumed  percentage of use within EU territorial waters ).

 

CONDITIONS

 

ALL of the following conditions must be met in order for the VAT treatment prescribed in the Yacht Leasing Scheme to apply:

  • A lease agreement is concluded between a Cyprus company registered for VAT in Cyprus, and be any natural or legal person, irrespective of country of incorporation or residency[2].
  • The yacht arrives in Cyprus within 1 month from the date of inception of the lease agreement. Any extension of aforementioned time limit may only be given by the VAT Commissioner. Such extension shall not exceed, under any circumstances, the time at which the option to purchase the yacht is exercised.
  • At the inception of the lease agreement an initial payment amounting to at least 40% of the value of the yacht must be paid by the lessee to the lessor.
  • Lease payments should be payable on a monthly basis and the agreement for the leasing of the yacht must not be less than 3 months (91 days) and in no circumstances more than 48 months.
  • The lessor is expected to have a profit from the lease agreement of at least 5% of the total value of the yacht.  At the inception of the lease agreement, the total amount of the lease payments on which the VAT is accounted, is increased by the half of the profit i.e. 2.5%.
  • The yacht may be purchased outright by the lessee at the end of the lease period. The final payment should not be less than 2.5% of the initial value of the yacht. Such final payment will be subject to the standard VAT rate in effect at the date of payment (i.e. 19%).
  • A written approval must be received in advance by the Commissioner of VAT, who will calculate the presumed percentages of use within the EU territorial waters. The application should be accompanied by the certificate indicating the price of the yacht (surveyors valuation and bill of sale) along with the lease agreement between the lessor and the lessee.
 

VAT CERTIFICATE

 

On entering into the scheme, the VAT Authorities will issue a provisional VAT paid certificate. In the case where the lessee exercises the option to buy the yacht at the end of the lease period, the VAT authorities will issue a certificate to the lessee confirming full payment of the total VAT liability, provided that all the VAT liability has been paid.

 

OTHER TAXES

 

Stamp duty:

Cyprus stamp duty is levied on ‘documents’ (i.e. written agreements/contracts) relating to assets located in Cyprus and/or matters or things taking place in Cyprus.

Stamp duty is calculated on the value of the agreement at 0% for the first €5,000, 0.15% between €5,001 and €170,000 and at 0.2% thereafter. As of March 2014 onwards, stamp duty due on agreements effected is capped to a maximum of €20,000 per stampable agreement. The person legally liable to pay such stamp duty (unless otherwise stated on the agreement) is the purchaser. The due date for such stamp duty payment is within 30 days from the day of the ‘signing’ of a document which is considered to be subject to stamp duty.

In order to be able to obtain the approval of the Cyprus VAT Authorities to use the Yacht Leasing Scheme, the lease agreement must be duly stamped.

Income tax:

In addition to the VAT liability on the Yacht Leasing scheme there are also income tax implications resulting from the acquisition, leasing and usage of a pleasure boat under the scheme. These are set below:

  1. The lessor company is subject to 12.5% Corporation tax on 5% of the value of the vessel (section 33 of Income Tax Act
  2. Any expenses such as accounting, audit e.t.c. will be disallowed in reaching the net margin of 5%
  3. No capital allowance is allowed to the lessor

 

PRACTICAL EXAMPLE

 

Yacht information
   
Value of the yacht € 21,000,000
Length 40 meters
Type of yacht Motor yacht
Presumed use in EU (Table A) 20%
Monthly instalments – Calculation
 
Total value of yacht 21,000,000
2.5% of required profit 525,000
Total value plus 2.5% of expected profit 21,525,000
Less balloon payment (40% of value) 8,400,000
Total lease instalments 13,125,000 (273,437.50 x 48 instalments)
Residual value 2.5% of total value 525,000
Total cash paid to lessor 22,050,000
VAT and Tax liability calculation
      Year 1 Year 2 Year 3 Year 4 Total
     
VAT Impact   Effective VAT rate          
Balloon payment 8,400,000 3.8% 319,200       319,200
Monthly lease payments 273,438 3.8% 124,688 124,688 124,687 124,687 498,750
Residual value 525,000 19%       99,750 99,750
Total VAT             917,700
Tax impact   Effective Income tax rate          
Taxable profit for the year 1,050,000   262,500 262,500 262,500 262,500 1,050,000
Income tax per year   12.5% 32,813 32,813 32,812 32,812 131,250
Total VAT and Income Tax             1,048,950
Effective tax rate             5.00%

From the above table it is concluded that the effective rate of tax for the particular yacht is 5.00% (€1,048,950/€21,000,000).

 

PROPOSED STRUCTURE

 

 

 

 

HOW CAN LSTS ASSIST YOU

 

  • Set up the required legal entities to hold the yacht
  • Draft the required lease agreement
  • File all necessary documents for participating in the scheme
  • Comply with all subsequent requirements after joining the scheme

[1] Even though the lessee can be any natural of legal person, irrespective of country of incorporation or residency, we recommend that a Cyprus company is also used.

[2] Even though the lessee can be any natural of legal person, irrespective of country of incorporation or residency, we recommend that a Cyprus company is also used.

[3] The effective rate is calculated as the presumed percentage of use within EU territorial waters (i.e. 20%) on the standard VAT rate (i.e. 19%)

[4]The final payment should not be less than 2.5% of the initial value of the yacht. Such final payment will be subject to the standard VAT rate in effect at the date of payment (i.e. 19% from 2014)

 


  • -

Protection of Intellectual Property Rights through Cyprus

Tags : 

Intellectual Property in Cyprus

In July 2012 the Cyprus Income Tax Law, Law 118 of 2002 was amended to provide, amongst others, very beneficial tax incentives and exceptions relating to income deriving from intellectual property rights (“IP”). The legislation adopts the beneficial principles of already established and successfully implemented tax legislation in European countries such as Luxembourg, Ireland and UK and gives Cyprus a competitive edge in the tax planning arena when dealing with IP.

The basis of the legislation adopted by governments in relation to the beneficial tax regime on IP is the provision of additional incentives for companies to retain and commercialise existing patents and to develop new innovative patented products, with an indirect benefit to the public such as the example of Nokia and Finland.

The mobility attributes of IP, derived from its non-tangible nature, makes it ideal for cross border planning as it can easily be transferred between different jurisdictions, subject always to prevailing tax legislations and circumstances.

This article analyses the provisions of the new IP tax legislation and sets examples of how a Cyprus company can be used for tax planning purposes in both groups owning IP or individuals entrepreneurs looking to benefit from the registration and development of the IP.

The provisions of the revised tax legislation relating to IP and which became effective from 1 January 2012 are analysed below:

DIRECT TAX BENEFITS
Amortisation period – 5 years

The cost of acquisition or development cost of IP by a Cyprus company (“CypCo”) is now amortised for 5 years, yielding a write down allowance of 20% per year.

The importance of this provision is that amortisation for tax purposes is no longer linked to the useful life of the IP (i.e. a patent with validity of 25 years would get a 4% writing down allowance), which yields considerable cash flow benefits by deferring the tax liabilities, especially if the value of the IP is high.

Exemption of 80% of profits deriving from the IP

80% of the profits earned from the use of IP (including any compensation for improper use) are exempt for tax purposes. The 80% exemption applies on the net profit after deduction of all direct expenses including amortisation.

Exemption of 80% of profits from disposal of the IP

80% of the profits from the disposal of the IP is exempt for tax purposes. The 80% exemption applies on the net profit after deduction of all direct expenses.

Further deduction of indirect expenses resulting in even lower effective tax rate

In addition to the direct expenses being deductible before the 80% exemption, such being  the amortisation and the interest costs of financing the acquisition, any indirect expenses that can properly be substantiated are deductible from the remaining profit of the CypCo. Applying the Cyprus corporate tax rate of 12.5% makes the effective tax rate on income derived from IP lower than 2.5%, which is the lowest in EU.

Furthermore any income earned by the CypCo relating to IP and paid to the shareholder in the form of dividends is exempt from any withholding tax in Cyprus thus resulting in minimum tax leakage in Cyprus when a CypCo holds the IP and generates income from it which it then distributes to its shareholders.

TAX BENEFICIAL STRUCTURE

In addition to the benefits provided by the provisions in the new tax legislation, Cyprus has an extensive network of double tax treaties and is also a member of the EU, giving CypCos the benefits of the EU Interest and Royalties directive resulting in low to zero withholding taxes by the payer of the royalties. Any withholding tax on royalties can be used as a credit when calculating the tax payable in Cyprus.

Below is the beneficial tax structure as well as an example for the tax calculation (Click image to enlarge in a new window):

Cyprus IP Structures

INDIRECT TAX BENEFITS

In light of the increasing court cases questioning the substance of intermediary companies acting as sub-licensees to obtain tax treaty benefits, which are often being viewed as “conduits” such as the case of Russian Monetka [1], the recent changes in Cyprus tax legislation remove one area of vulnerability from the taxpayer’s point of view, namely the need for an offshore company holding the IP and an intermediate ‘‘conduit’ receiving IP generated income.

Since the CypCo will be the legal owner of the IP and provided that sufficient substance exists in the CypCo, such as skilled Directors not controlled by a Russian company and evidence of the IP being developed or enhanced in Cyprus then the beneficial ownership principle as set in the Russia –Cyprus double tax treaty is more likely to be met.

Note that it is crucial that sufficient documentation exists regarding the IP development that would assist in making assertions for defence during a tax audit.

CONCLUSION

The attributes that investors seeks from a jurisdiction to hold the IP is the low effective tax rate and also the legal protection of the IP.

Cyprus under the new provisions of the legislation benefits from a very low effective tax rate on the IP generated revenue and also has a mature and sophisticated legal framework based on the English law principles providing the appropriate legal protection on IP. It also has a highly skilled and well-educated IT workforce which can be utilised in the development or enhancement of the IP thus providing additional substance making Cyprus the most beneficial jurisdiction to holding and deriving revenue from IP.


[1] Element-TradeLLC, a company incorporated and resident in Russia, exploited the trademark MONETKA and paid royalties to a Cyprus company acting as an intermediary licensing vehicle. The Cyprus company paid the royalties it received to the ultimate owner of the trademark, a British Virgin Islands company.

The Russian tax authorities contended that this structure was introduced purely for the purpose of avoiding withholding taxes on royalties paid from Russia to a company in the British Virgin Islands, which is on the Russian Ministry of Finance’s blacklist of tax havens, by routing the royalties through Cyprus. On 17 May , 2012 the Federal Arbitrazh Court of the Urals District in Russia issued its ruling in favour of the taxpayer. That was a marginal “win” on formal grounds and had representation been better in the case the decision could have been different.

*image


Search For

Twitter

Social Media

Twitter
Visit Us
LinkedIn
Facebook
Facebook
Google+
Google+
http://www.lsts.com.cy/tag/european-union/">
RSS
Follow by Email
SHARE

Review our Updated Cyprus Double Tax Treaty Network

Twitter
Visit Us
LinkedIn
Facebook
Facebook
Google+
Google+
http://www.lsts.com.cy/tag/european-union/">
RSS
Follow by Email
SHARE